The next part of my story centers around frauds 6, 7, 8, and 9 of 11 criminal frauds.
Bond insurance is a service whereby issuers of a bond can pay a premium to a third party, who will provide interest and capital repayments as specified in the bond in the event of the failure of the issuer to do so. The effect of this is to raise the rating of the bond to the rating of the insurer; accordingly, a bond insurer’s credit rating must be almost perfect.
The premium requested for insurance on a bond is a measure of the perceived risk of failure of the issuer.
The economic value of bond insurance to the governmental unit, agency, or company offering bonds is a saving in interest costs reflecting the difference in yield on an insured bond from that on the same bond if uninsured. Insured securities ranged from municipal bonds and structured finance bonds to collateralized debt obligations (CDOs) domestically and abroad.
The Ambac Suit: Bear Stearns Execs Double-Dipped, Committed Criminal Fraud on Investors
By: David Dayen Tuesday January 25, 2011 11:01 am
The mortgage traders at Bear, who now are spread out across the financial sector, sold purposefully bad securities to investors – emails revealed show that they told superiors they were selling “a sack of shit.” They got data on their pools of mortgages bundled up in securities deals that came back with high percentages of bad underwriting or even loans already slipping into default. They falsified that data for the rating agencies to get AAA ratings, never told the investors about the bad loans in the pools, and sold the shit as gold. But it gets worse.
They got paid by the investors for selling the mortgage-backed security, AND they got paid by the originator for taking back the bad loan. So Bear traders made money on the same mortgage twice. Only the investors could force a put-back on an originator after the security was sold – Bear Stearns didn’t have a legal claim on the loan after they sold it. They did so anyway.
There is no legal universe under the sun where that isn’t just criminal fraud and theft. Ambac eventually discovered that 80% of the loans in its MBS had an early payment default. They were corrupted and substandard from the moment they received them, so awful that Bear Stearns was forcing the bank to take them back – even though they didn’t own the loans.
This Ambac suit names the actual decision-makers, Marano and two others who are working at Goldman Sachs and Bank of America. JPMorgan, which now owns Bear Stearns, is named in the lawsuit as well, as a responsible party. It seems that this is a pretty standard repurchase lawsuit, but Ambac added accounting fraud to the claim to double the award owed to them.
The original Atlantic article-
E-mails Suggest Bear Stearns Cheated Clients Out of Billions
Teri Buhl, The Atlantic
Jan 25 2011, 1:01 AM ET
Former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at Bear. According to e-mails and internal audits, JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through legal maneuvering. Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was unsealed. The lawsuit’s supporting e-mails, going back as far as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a “sack of shit.”
According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds. The Marano-led traders also cut the time allowed for early payment defaults, without telling the bond investors. That way, Bear could quickly securitize defective loans, without leaving enough time for investors to do their own due diligence after the bonds were sold and put-back any bad loans to Bear.
The traders were essentially double-dipping — getting paid twice on the deal. How was this possible? Once the security was sold, they didn’t have a legal claim to get cash back from the bad loans — that claim belonged to bond investors — but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme, and thus, are named as individual defendants in the suit.
Last week, JPMorgan CEO Jamie Dimon said it will take years to get through mortgage litigation risk the bank inherited and had set aside around $9 billion for litigation-related risk. Yet in the bank’s January earnings call, Dimon suggested that the bank may not have to buy back any soured mortgages from private investors and said that the issue is “not that material” for JPMorgan. Still, Ambac recently won a court order in December to add accounting fraud against JPMorgan to its suit, which can double or triple lawsuit awards. So it’s hard to tell whether America’s largest bank is prepared to pay for the sins of Bear. JPMorgan did fight tooth and nail for the Ambac suit not to be made public, however, because the firm argued it could damage the reputations of senior bank executives currently working in the industry. Individuals named as defendants in the amended complaint include: Jimmy Cayne, Alan “ACE” Greenberg, Warren Spector, Alan Schwartz, Thomas Marano, Jeffrey Mayer, Mary Haggerty, Baron Silverstein, Jeffrey Verschleiser, and Michael Nierenberg. But the court chose to fold these individuals into the charges against JPMorgan as the case goes through appeal.
JPMorgan is not the only firm in trouble-
Countrywide Accused in Lawsuit of ‘Massive Fraud’
By Karen Freifeld, Bloomberg News
Jan 25, 2011 5:54 PM ET
Bank of America Inc.’s Countrywide Financial unit, acquired by the bank in 2008, was accused of “massive fraud” in a lawsuit by investors who claim they were misled about mortgage-backed securities.
TIAA-CREF Life Insurance Co., New York Life Insurance Co. and Dexia Holdings Inc. are among a dozen institutional investors who filed the complaint yesterday in New York state Supreme Court.