![]() As the lawsuit lays out, JPMorgan is responsible for the flagrant accounting fraud started by Bear designed to avoid, and has continued to avoid, recognition of vast off-balance sheet exposure relating to its contractual repurchase agreements. By JPMorgan taking over Bear, it became the successor of interest in Bear Stearns. Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to Keith Lind, a Managing Director on the trading desk, referring to a particular bond, SACO 2006-8, as "SACK OF SHIT 8" and said, "I hope your making a lot of money off this trade." It's this blatant internal awareness inside the Bear mortgage trading division that the Ambac suits says led Bear to implement an across-the-board strategy to disregard its contractual promises and conceal the defective loans. 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. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. ![]() 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. The traders were essentially double-dipping - getting paid twice on the deal. 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 Marano-led traders also cut the time allowed for early payment defaults, without telling the bond investors. 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. 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. He is now an executive in Goldman Sachs' mortgage division. He was joined in this scheme by Jeff Verschleiser, his peer and Senior Managing Director on the mortgage and asset-backed securities trading desk and head of whole loan trading. Mike Nierenberg, who ran the adjustable-rate mortgage trading desk at Bear and is now the head of mortgages and securitization for Bank of America, was a key player ensuring the defaulting loans Bear was buying would move off their books right after they bought them, with little concern for the firm's due diligence standards. They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally's mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans off its books. But according to depositions and documents in the Ambac lawsuit, Bear's misdeeds went even deeper. ![]() Ex-EMC analysts admitted they were sometimes told to falsify loan-level performance data provided to the ratings agencies who blessed Bear's billion-dollar deals. News of internal whistleblowers coming forward from Bear's mortgage servicing division, EMC, was first reported by The Atlantic in May of last year. 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." They were selling investors like Ambac a "sack of shit." Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was unsealed. ![]() 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. 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. Lawsuit alleges the bank took extreme measures to defraud investors, and now JPMorgan may be on the hook This post has been corrected.
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