[Vision2020] Diseased Whores Not Seeking Treatment

[Art Deco]

[image: DealBook - A Financial News Service of The New York
Times]<http://dealbook.nytimes.com/>
February 6, 2013, 10:31 pmE-Mails Imply JPMorgan Knew Some Mortgage Deals
Were BadBy JESSICA
SILVER-GREENBERG<http://dealbook.nytimes.com/author/jessica-silver-greenberg/>

When an outside analysis uncovered serious flaws with thousands of home
loans, JPMorgan
Chase<http://dealbook.on.nytimes.com/public/overview?symbol=JPM&inline=nyt-org>executives
found an easy fix.

Rather than disclosing the full extent of problems like fraudulent home
appraisals and overextended borrowers, the bank adjusted the critical
reviews, according to documents filed early Tuesday in federal court in
Manhattan. As a result, the mortgages, which JPMorgan bundled into complex
securities, appeared healthier, making the deals more appealing to
investors.

The trove of internal e-mails and employee interviews, filed as part of a
lawsuit by one of the investors in the securities, offers a fresh glimpse
into Wall Street's mortgage machine, which churned out billions of dollars
of securities that later imploded. The documents reveal that JPMorgan, as
well as two firms the bank acquired during the credit crisis, Washington
Mutual<http://topics.nytimes.com/top/news/business/companies/washington_mutual_inc/index.html?inline=nyt-org>and
Bear
Stearns<http://topics.nytimes.com/top/news/business/companies/bear_stearns_companies/index.html?inline=nyt-org>,
flouted quality controls and ignored problems, sometimes hiding them
entirely, in a quest for profit.

The lawsuit, which was filed by Dexia, a Belgian-French bank, is being
closely watched on Wall Street. After suffering significant losses, Dexia
sued JPMorgan and its affiliates in 2012, claiming it had been duped into
buying $1.6 billion of troubled mortgage-backed securities. The latest
documents could provide a window into a $200 billion case that looms over
the entire industry. In that lawsuit, the Federal Housing Finance Agency,
which oversees Fannie
Mae<http://dealbook.on.nytimes.com/public/overview?symbol=FNMA&inline=nyt-org>and
Freddie
Mac<http://dealbook.on.nytimes.com/public/overview?symbol=FMCC&inline=nyt-org>,
has accused 17 banks of selling dubious mortgage securities to the two
housing giants. At least 20 of the securities are also highlighted in the
Dexia case, according to an analysis of court records.

In court filings, JPMorgan has strongly denied wrongdoing and is contesting
both cases in federal court. The bank declined to comment.

Dexia's lawsuit is part of a broad assault on Wall Street for its role in
the 2008 financial crisis, as prosecutors, regulators and private investors
take aim at mortgage-related securities. New York's attorney general, Eric
T. Schneiderman<http://topics.nytimes.com/top/reference/timestopics/people/s/eric_t_schneiderman/index.html?inline=nyt-per>,
sued JPMorgan last year over investments created by Bear Stearns between
2005 and 2007.

Jamie Dimon<http://topics.nytimes.com/top/reference/timestopics/people/d/james_dimon/index.html?inline=nyt-per>,
JPMorgan's chief executive, has criticized prosecutors for attacking
JPMorgan because of what Bear Stearns did. Speaking at the Council on
Foreign Relations<http://topics.nytimes.com/top/reference/timestopics/organizations/c/council_on_foreign_relations/index.html?inline=nyt-org>in
October, Mr. Dimon said the bank did the federal government "a favor"
by
rescuing the flailing firm in 2008.

The legal onslaught has been costly. In November, JPMorgan, the nation's
largest bank, agreed to pay $296.9 million to settle claims by the Securities
and Exchange Commission<http://topics.nytimes.com/top/reference/timestopics/organizations/s/securities_and_exchange_commission/index.html?inline=nyt-org>that
Bear Stearns had misled mortgage investors by hiding some delinquent
loans. JPMorgan did not admit or deny wrongdoing.

"The true price tag for the ongoing costs of the litigation is terrifying,"
said Christopher Whalen, a senior managing director at Tangent Capital
Partners.

The Dexia lawsuit centers on complex securities created by JPMorgan, Bear
Stearns and Washington Mutual during the housing boom. As profits soared,
the Wall Street firms scrambled to pump out more investments, even as
questions emerged about their quality.

With a seemingly insatiable appetite, JPMorgan scooped up mortgages from
lenders with troubled records, according to the court documents. In an
internal "due diligence scorecard," JPMorgan ranked large mortgage
originators, assigning Washington Mutual and American Home
Mortgage<http://topics.nytimes.com/top/news/business/companies/american_home_mortgage_investment_corporation/index.html?inline=nyt-org>the
lowest grade of "poor" for their documentation, the court filings
show.

The loans were quickly sold to investors. Describing the investment
assembly line, an executive at Bear Stearns told employees "we are a moving
company not a storage company," according to the court documents.

As they raced to produce mortgage-backed securities, Washington Mutual and
Bear Stearns also scaled back their quality controls, the documents
indicate.

In an initiative called Project Scarlett, Washington Mutual slashed its due
diligence staff by 25 percent as part of an effort to bolster profit. Such
steps "tore the heart out" of quality controls, according to a November
2007 e-mail from a Washington Mutual executive. Executives who pushed back
endured "harassment" when they tried to "keep our discipline and controls
in place," the e-mail said.

Even when flaws were flagged, JPMorgan and the other firms sometimes
overlooked the warnings.

JPMorgan routinely hired Clayton Holdings and other third-party firms to
examine home loans before they were packed into investments. Combing
through the mortgages, the firms searched for problems like borrowers who
had vastly overstated their incomes or appraisals that inflated property
values.

According to the court documents, an analysis for JPMorgan in September
2006 found that "nearly half of the sample pool" - or 214 loans - were
"defective," meaning they did not meet the underwriting standards. The
borrowers' incomes, the firms found, were dangerously low relative to the
size of their mortgages. Another troubling report in 2006 discovered that
thousands of borrowers had already fallen behind on their payments.

But JPMorgan at times dismissed the critical assessments or altered them,
the documents show. Certain JPMorgan employees, including the bankers who
assembled the mortgages and the due diligence managers, had the power to
ignore or veto bad reviews.

In some instances, JPMorgan executives reduced the number of loans
considered delinquent, the documents show. In others, the executives
altered the assessments so that a smaller number of loans were considered
"defective."

In a 2007 e-mail, titled "Banking overrides," a JPMorgan due diligence
manager asks a banker: "How do you want to handle these loans?" At times,
they whitewashed the findings, the documents indicate. In 2006, for
example, a review of mortgages found that at least 1,154 loans were more
than 30 days delinquent. The offering documents sent to investors showed
only 25 loans as delinquent.

A person familiar with the bank's portfolios said JPMorgan had reviewed the
loans separately and determined that the number of delinquent loans was far
less than the outside analysis had found.

At Bear Stearns and Washington Mutual, employees also had the power to
sanitize bad assessments. Employees at Bear Stearns were told that they
were responsible for "purging all of the older reports" that showed flaws,
"leaving only the final reports," according to the court documents.

Such actions were designed to bolster profit. In a deposition, a Washington
Mutual employee said revealing loan defects would undermine the lucrative
business, and that the bank would suffer "a couple-point hit in price."

Ratings agencies also did not necessarily get a complete picture of the
investments, according to the court filings. An assessment of the loans in
one security revealed that 24 percent of the sample was "materially
defective," the filings show. After exercising override power, a JPMorgan
employee sent a report in May 2006 to a ratings agency that showed only 5.3
percent of the mortgages were defective.

Such investments eventually collapsed, spreading losses across the
financial system.

Dexia, which has been bailed out twice since the financial crisis, lost
$774 million on mortgage-backed securities, according to court records.

Mr. Schneiderman, the New York attorney general, said that overall losses
from flawed mortgage-backed securities from 2005 and 2007 were $22.5
billion.

In a statement shortly after he sued JPMorgan Chase, Mr. Schneiderman said
the lawsuit was a template "for future actions against issuers of
residential mortgage-backed securities that defrauded investors and cost
millions of Americans their homes."

-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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