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


“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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