New York Attorney General Eric Schneiderman filed a civil lawsuit against Bear Stearns yesterday. Many news sources are reporting on the lawsuit, but here’s an article from the New York Times, which includes a PDF of the actual complaint filed. Bear Stearns Co. is now a subsidiary of J.P. Morgan Chase – purchased by the larger bank with major government support in the early days of the financial crisis.
In the years leading up to 2008, Bear Stearns Co. purchased subprime and other high risk mortgages in large quantities from originating lenders, including EMC Mortgage and American Home Mortgage. Bear Stearns packaged these risky loans into securities, which they then sold to investors as ‘healthy’ investments. According to the Attorney General, the investment bank defrauded investors who purchased mortgage securities packaged by the company between 2005 and 2007. Schneiderman is suing the firm for two counts of fraud: securities fraud, and a cause of action under the New York State Martin Act. Broadly, the Marin Act allows the New York Attorney General power to hold companies accountable for financial crimes. However, it is associated with broad subpoena power, and includes a very loose definition of “fraud.” For this reason, Ashby Jones has contended in the Wall Street Journal that the Martin Act’s powers exceed those given any other regulator in any other state.
The actual complaint filed in New York County yesterday argues that Bear Stearns “systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans.” If you have a second, the complaint is really worth reading. Especially out loud to your friends who may work at investment banks. As evidence of Bear Stearns’ willful misconduct, the complaint notes that internal communication between Bear Stearns’ employees refers to the SACO 2006-8 RMBS securitization (one of the many problematic securities that Schneiderman mentions) as a “SACK OF SHIT” and “shit breather.” This is revolting.
Irresponsible lending and faulty representation of mortgage values are central themes to the work that we do at UHAB to fight Predatory Equity. So we’re excited: Schneiderman’s case against the J.P. Morgan Chase is big step forward in the long battle to prosecute investment banks for their irresponsible practices which have crippled the U.S. and world economy. Though many private security investors have sought legal action against Bear Stearns for their losses, this is the first large scale civil suit on behalf of allinvestors (and “the people of New York State.”) And perhaps more importantly, the lawsuit goes after a bank for its widespread behavior rather than misconduct in a specific case. The complaint notes that collectively, investors have lost billions of dollars thanks to Bear Stearns’ negligence.
Of course, those billions of dollars lost represents billions of dollars in payments that the low and middle income homeowners were unable to make on their subprime mortgages – and many of whom have subsequently lost their homes. I haven’t checked out exactly who is invested in Bear Stearns securities but it probably wasn’t them. (Though their pension fund managers may have invested.) As exciting and ground-breaking as this suit may be (filing isn’t as big a deal as winning is), we’d like to see something as comprehensive and as meaningful for the millions of people who are facing foreclosure.