JP Morgan Chase, Bear Stearns & the Rest of the Story on RMBS Liability

rcwhalen's picture


“If it can be shown that mortgages weren't put into trusts, but were intead re-hypothecated to collateralize other borrowings, how could a judge not bust the trust and grant rescission?   

Manal Mehta

Washington -- In our last episode, we spoke about JPMorgan Chase (JPM) CEO Jamie Dimon told investors a while ago that the acquisition of Bear, Stearns & Co. would not be material to investors.  You can read that comment by clicking below: “Memo to Jamie Dimon: You Still Think Bear Stearns is Not Material??”

This comment, however, only scratches the surface regarding JPM’s prospective liability regarding Bear, Stearns & Co. (BSC).  Here’s how one litigator involved in representing orphan claims in the various RMBS litigation in New York describes the scene: 

“The Second Circuit recently ruled that for class action standing purposes you look to the common registration statement, not the take-down nor the tranche.  As you know, the lower courts had been looking to the take-down, and (increasingly) the tranche.  This had the effect of whittling down Big Bank's theoretical exposure in '33 Act securities fraud class actions.” 

“The Second Circuit has now reversed this, but after some (but not all) of the big class actions settled.  I thought this might happen, and it's the right conclusion under the law, I believe… It means that the named plaintiffs in the originally filed cases have had standing to represent bigger groups of holders.  If these other holders were so represented, then the statute of limitations for them should be tolled (per American Pipe)so that they should be entitled to a class settlement.":

He continues:  “Better still, they can opt-out.  It gets easier and easier to prove these cases, as the facts you need to prove get established in other proceedings and even become common knowledge.  It still amazes me that "perpetrated massive fraud in deals involving billions" is old news and nothing has still happened.  There are a lot of potential claims that could get filed as individual private actions.  If filed they should get decent percentage settlements.”

Keep in mind that the RMBS production by BSC is some of the worst in the market, begging the question again as to why NY AG Eric Schneiderman has failed to bring a legal action before today.  As another litigator opines: “But what am I missing?  I could have copied any one of the several private complaints against Bear Stearns filed in the last few years, and then added Martin Act “causes of action” at the end and I’d have Schneiderman’s complaint.  It doesn’t show any independent investigation on the NYAG’s part.  Note that Schneiderman’s complaint doesn't name any culpable individuals.”

Utimately I don’t think that the litigation brought by Schneiderman or the US Attorney with respect to the London  Whale Bruno Iksil will amount to anything significant for JPM.  But the civil litigation involving these securities could get really interesting if the lawyers representing the plaintiffs understand the hand that they currently hold.  Many of the settlements seen to date have been done for pennies, usually because the plaintiff firm runs out of money and patience in the face of scorched earth tactics by corporate defense counsel.  

The litigation involving Bank America (BAC) subsidiary Countrywide Bank is a case in point, but in that litigation as well as with BSC, the plaintiffs arguably have the potential to win rescission of the original RMBS.  The only question is whether the investors and their advisors understand their rights and the value of potential claims.  

Something like half of the potential claims in the BAC and JPM litigation have not been filed with courts, raising an interesting question about the legal exposure of advisors who failed to act in a timely fashion to protect the rights of their clients.  And worst of all, Schneiderman has yet to do his duty under the law to help investors.  And what should Eric Schneiderman do?

1) The State of New York should be seeking the removal of Bank of New York (BK) as custodian with respect to all RMBS trusts operated pursuant to NY law and immediately file a claim on behalf of all investors against BK for negligence.

2) NY AG Scheiderman should seek the appointment of a new custodian to replace BK and also seek a receiver under federal law with respect to these RMBS.  We need the power of a federal receiver to attack the fraud at JPM, BAC and the other zombie banks.  That receiver will also act to restore monies to investors.  

The bottom line for JPM, BAC and other banks facing RMBS litigation is that the proverbial party is just getting interesting.  But will we be speaking about new reserves for these “potential” claims in Q3 earnings statements?  Hell no.  

I will have thoughts on Q3 bank earnings tomorrow AM.  See you on CNBC’s “Squawk Box tomorrow” ~ 8:00 ET. 

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binky's picture

"Keep in mind that the RMBS production by BSC is some of the worst in the market, begging the question again as to why NY AG Eric Schneiderman has failed to bring a legal action before today."

A lesson was learned when Eliot Spitzer, Sheriff of Wall Street was taken down right before he was going to move on mortgage fraud. Something has happened to clear the path. Then Governor Spitzer committed the heinous act of talking on his phone after someone close set him up, most likely for revenge. Most likely the current NY AG is confident that no skeletons will be found to trip him up.

Maybe this is part of the answer to this damn big (and still begging) question.

waterhorse's picture

Since these loans never made it into the trusts and violated REMIC, has anyone ever estimated how many dollars in fraud this would be, including penalties, interest, etc.  I haven't seen any articles about what I would guess to be TRILLIONS in REMIC fraud (unless there was an article here awhile back and I missed it?)

Seasmoke's picture


"House Of Cards"

I don't wanna be your friend
I just wanna be your lover
No matter how it ends
No matter how it starts

Forget about your house of cards
And I'll do mine
Forget about your house of cards
And I'll do mine

Fall off the table,
And get swept under
Denial, denial

The infrastructure will collapse
From voltage spikes
Throw your keys in the bowl
Kiss your husband 'good night'

Forget about your house of cards
And I'll do mine
Forget about your house of cards
And I'll do mine

Fall off the table,
And get swept under

Denial, denial
Denial, denial

Your ears are burning
Denial, denial
Your ears should be burning
Denial, denial

gregga777's picture

The overwhelming magnitude of the fraud perpetrated has caused grievous material harm to every American, falling especially on those outside the privileged, highly-wealth, highly-paid class. I am sure that our inJustice system would not allow it, but It seems to me that a class action suit on behalf of all of the aforementioned Americans should be filed against the gangsters who perpetrated and enabled the subject articles citation of criminal, white collar fraud.

Perhaps a more viable action would be a RICO prosecution against the gangsters. The gangsters being the bankers, all entities responsible for mortgages from beginning to end, enabling corrupt Federal government political appointees in the alphabet-soup of Federal agencies responsible for oversight of the process, also such as Treasury agency officials, employees and political appointees, elected Senators and Congresspersons, and so on--oh, and I would throw in the Justice department from top down.

It will never happen until the sheep wake up and begin to care enough to find out what happened and take the culprits to court with prosecutors, defense lawyers, judges and juries.

If you are going to dream about restoring America--DREAM BIG!

W10321303's picture

'My methods are sane, but my aim is MADNESS'...Captain Ahab

More JP Morgan Whitewash

Via e-mail, some updates from Michael Crimmins, a bank compliance expert and member of Occupy the SEC, on the continuing failure of the media to portray the real significance of the JP Morgan London Whale losses: that it revealed glaring deficiencies in internal controls that warrant prosecution of Jamie Dimon under Sarbanes Oxley (SOX). This section of a July post by Crimmins explains why the London Whale control failures are serious. JP Morgan’s kid gloves treatment by the press shows it pays to be a major advertiser:

JP Morgan’s jawdropping revelations in its Friday earnings call don’t seem to be attracting the attention they deserve. The market may have shrugged off the size of the losses and the corporate governance modifications plans, but the announcement opens the door wide for the next phase of this scandal. The biggest question is whether Jamie Dimon should keep his job.

The first stunner, that JP Morgan was restating the first quarter financials, should have caused a deafening ringing of alarm bells. For a company of JP Morgan’s stature to be compelled to restate prior period financials is a very clear signal of bigger problems with their overall financial reporting. In isolation we would normally expect to see a massive selloff with an event of that seriousness. Analysts and reporters may have missed the significance since it was dropped into a footnote and overshadowed by the other disclosures.

Add in the magnitude of the restatement which increased the CIO losses by a massive 90% over the previously reported losses and you’d expect to see further panic. The original 1Q12 results included a loss of $718 million. The restated results added another $660 million , bringing the total first quarter loss to $1.4 billion.

But the real cause for alarm is the reason for the restatement. JPM was forced to disclose that it relied on its traders to provide honest and accurate valuations for its financial statement disclosures. That’s like putting the foxes in charge of not just the henhouse, but the entire farm. Much to its chagrin that was a costly choice. Note that was not a mistake, but a conscious choice.


THE EMPIRE is run by the criminally insane!




ItsDanger's picture

So they were including assets in a trust as part of their own balance sheet, or using them in other MBS vehicles?  This really isnt that complicated and can be proven with various filings.  What a fuckin mess.

Winston Churchill's picture

They booked the sale of the Notes(@40% profit) on their P & L's.So much money was flooding  into the banking system

from the SBS , that they had to use the Notes as collateral in the repo market where the money

was 'parked' awaiting allocation(at which point it was stolen).They then fractioned up an ammount and put

it into trust accounts.Not even seperate trust accounts , just vast pools of comingled trusts money(supposedly).

Classic overtrading situation, that probably started out innocently, until they realized what they could /did get away

with, then it was party hearty time.Sell the Notes to ten different trusts,use it again in the repo market, then

steal the CDS proceeds that were supposed to go to the RMBS investors.Then screw the taxpayer to cover the stolen money

sitting in the Caymans.No crimes though according to Obummer..

Cheyenne's picture

That's fucking insane, but at this point it's pretty clear that Wall Street is flat out stealing anything that's not nailed down, so I don't doubt you. Do you have a book or a cite (legal or otherwise) that lays this out?

Winston Churchill's picture .  A poacher turned gamekeeper.

The lawyer who runs it used to work on Scam Street.Forensic accountant reports,case law,

specifics ,and general legal advice.Its all there in black and white for anyone to read,even

our Dear Leader.

Cheyenne's picture

"Something like half of the potential claims in the BAC and JPM litigation have not been filed with courts, raising an interesting question about the legal exposure of advisors who failed to act in a timely fashion to protect the rights of their clients."

Lawyers who allowed clients' claims for fraud to expire under the statute of limitations are exposed to legal malpractice claims. The lawyers are insured, of course, by companies like CNA, which will bear the costs of defense and any judgments.

The problem is that when defrauded parties bring cases for the kind of malfeasance at issue here, they have to add all other legal claims, including negligence, arising out of the same transactions, or those claims are waived. But the statute of limitations for negligence is shorter, typically by 2-3 years, than for fraud. And I've yet to see reporting on any such cases, despite the fact that most negligence cases are long dead due to the statute of limitations. That's as good an indication as any about the outcome of fraud cases. Like so much else, they'll get swept under Ponzi's rug.

Winston Churchill's picture

Think you meant investors.

They are caught in a double jeopardy situation here.

The money came directly out of comingled ' REMIC 'superaccounts' to the homeowners(leave the source of

funds out of it for a minute,thats a whole other fraud,the really big one).

The originators,wholesalers and Depositors to the trusts never funded anything as was required

by the trusts PSA's.It was supposed to be done that way for two reasons;bankruptcy remoteness

and to sheild the investors from multiple criminal and civil liabilites(TILA,RESPA,RICO UDTP etc etc) in the

writing of the mortgages.Now they are exposed and unwilling to come forward,plus if they do the 'assets'

could be lost in subsequent bankruptcies by they various entitys.

Nobody at this point can , or wants to, claim ownership of these notes,except the original

defrauders.Anbody defending foreclosure can now win by denying everything, and nobody can prove differently,

when the true source of the funds is discovered.

disabledvet's picture

"Is the fraud ongoing and if so who is responsible." The answer of course is yes because the Fed is buying MBS. Investigating BoNY/Mellon is all well and good...but they are just a conduit for the Fed "with Jamie Dimon watching everything they do." So "good luck with the prosecutions"...the real fraud is coming from the mortgage business not the banks...they're trying to drive prices higher...and once they fail then "they" will be arrested for "failure to prosecute the fraud in an effective manner" unlike say...the banks.

eatthebanksters's picture

Can we include Geithner as a defendant in the suits?

Piranhanoia's picture

Nothing will happen until the myth of RMBS is finally laid bare.  There were no pools, there were no trusts.

Can you stop pretending they ever existed?  Restore the property to the original owners first, or this country dies.  


Fishhawk's picture

Following the 'no financial crimes will be recognized' strategy under Obama's feckless leadership, the statute of limitations was being allowed to run out, so we could focus on "Forward" (ie, future financial crimes...).  If all the fraudulent RMBS tranches are put back to the originators, the banking losses will run to the hundreds of billions, or several times the total bank capitalization.  The political cover for another bank bailout is wearing thin; the banksters can only go to the bailout well so many times before faith in the system collapses and public opinion calls bullshit on the fraud.  Also, as NE points out, you can't out fraud at this level without providing a pretty high level perp walk.  The filing of this suit tells me that all the muppets have been face ripped, and the sharks are now turning on each other.  Such infighting among the financial elite can only hasten the collapse, so its all to the good. 


NotApplicable's picture

Meanwhile the foreclosures continue, even though there's not a single entity with legal standing to do so in regards to the original mortgages.

Thanks to MERS, chain of title has been irrevocably broken.

Rearranging Deckchairs's picture

I understand the theory that everything is f-ed because MERs has made a mess of chains of title. What a lot of people fail to understand is that we live in an adversarial legal system and title problems are not self evident or self effectating. Someone has to have an adequate incentive to challenge the title.

The title insurance companies are part owners of MERS they are still insuring title with MERS chain of title messes in the past. Yes there may be some question as to whether the REconveyances in the chain of title, or also assignments of mortgages and foreclosures are based on fraud. But statute's of limitation act to limit how long that title can be challenged. As far as reconveyances, its in no one's interest to challenge them. The Bank can't , they're estopped from claiming that the document is fraudulent. As for the fraudulent assignments and foreclosures, only the mortgagee can challenge them and only for a limited time. Statute's of limitation operate to end claims. After a couple of years, after the property has been bought again and financed again there is nothing anyone will do to challenge the chain of title. Now if the title insurers suddenly decided they had a problem insuring MERS clouded titles it would be an issue. But then owners could pursue "quiet title" actions en masse. Not a great situation but certainly would solve the problem for most  people.

So long as title insurers are willing to insure titles all these properties can still be financed and therefore bought and sold.

In other words unless something changes like some important states allow for loopholes to the statute of limitation problem its a non issue. And remember since the robosigning scandal has been known about for years now, the banks can argue that any issue should have been discovered long ago.

Don't get me wrong. Its a sign that we have a banana republic with no rule of law. But as far as a practical effect on the real estate market I just don't see one at this point.



disabledvet's picture

And people think the guns and ammo crowd are werdo's.

Rearranging Deckchairs's picture

Hey I don't rag on the guns and ammo crowd when they talk about stuff I don't understand.

Winston Churchill's picture

Classic control fraud.Policy set from the top down.

Trouble is ,so many were knowingly invoved in it,we probably will have to turn Long Island into a prison.

Sherrif Joe type conditions at the least.

Then again ,my prefernce is hanging ,drawing and quartering on pay cable.

disabledvet's picture

Somehow Wall Street has figured how to phuck us on price again though...and that IS ongoing. Some type of exchange needs to be set up to see just how many vacant properties are out there and available "for free." Many I have no doubt. Remember the story of the banker caught staying in a McMansion in Cali or Vegas or something? There's a reason that's a no no. Anywho we don't need to turn anything into a prison...just build a whole new city (doing it right now in North Dakota) and "let the Great Decamping begin." My personal favorite right now is the massive underground City underneath Detroit. How much is that real estate worth? I say A LOT...since the whole State of Michigan sits on a massive salt bed and will be the greatest Distribution Hub in North America once they start building their Underground Freight Railroad system.

Northeaster's picture

"Note that Schneiderman’s complaint doesn't name any culpable individuals.”

That would not be politically expedient for Schneiderman, I think you know this, and I don't know why you just don't come out and say it. Most of these criminals should have been BK'd on their HELOC positions alone, but the fraud upon us by those that govern us is allowed to continue.

Benjamin Glutton's picture

Just make all the documents public already so this can be sorted out once and for all.

NotApplicable's picture

Oh, they will. The moment they finish feeding the shredders.