(Bethany McLean is a Reuters columnist but her opinions are herown)
By Bethany McLean
NEW YORK, Oct 10 (Reuters) - Last week, New York AttorneyGeneral Eric Schneiderman, who is the co-chairman of theResidential Mortgage-Backed Securities Working Group - whichPresident Obama formed earlier this year to investigate who wasresponsible for the misconduct that led to the financial crisis- filed a complaint against JPMorgan Chase.
The complaint, which seeks an unspecified amount in damages(but says that investors lost $22.5 billion), alleges widespreadwrongdoing at Bear Stearns in the run-up to the financialcrisis. JPMorgan Chase, of course, acquired Bear in 2008.
Apparently, this is just the beginning of a Schneidermanonslaught.
"We do expect this to be a matter of very significantliability, and there are others to come that will also reflectthe same quantum of damages," Schneiderman said in an interviewwith Bloomberg Television. "We're looking at tens of billions ofdollars, not just by one institution, but by quite a few."
The prevailing opinion seems to be, Yay! Someone is finallymaking, or at least trying to make, the banks pay for theirsins. But while there is one big positive to the complaint,overall I don't think there's any reason to cheer.
Schneiderman's case clearly lays out the alleged badbehavior at the old Bear Stearns. Although Bear promisedinvestors it was doing due diligence on the mortgages itpurchased, it wasn't. Defendants "systematically failed to fullyevaluate the loans, largely ignored the defects that theirlimited review did uncover, and kept investors in the dark aboutboth the inadequacy of their review procedures and the defectsin the underlying loans," alleges the complaint.
Even worse, Bear would make deals with the sellers ofmortgages in which it would force them to make a payment forfailed mortgages, but instead of taking the bad loan out of thetrust, Bear would just keep the money - even though both Bear'slawyers and its accountants (this is truly stunning), accordingto Schneiderman's case, warned them that wasn't OK.
The complaint shows just how complicit the Bear bankers werein the proliferation of bad loans that almost took down theeconomy, and that alone makes it valuable. "He's finally tellingthe story so that people can understand the depth and magnitudeof what went on," says Eliot Spitzer, who had Schneiderman's jobafter the dot-com bust.
But beyond that, there's not much to applaud. The biggestflaw is that Schneiderman decided not to name any individuals, apractice that is sadly all too common in financial fraud cases.The New York Times argued that it's a strength that the casedoesn't focus on individuals and specifics, and instead allegesa broad pattern of fraud. But naming names is powerful.Anonymity is weak, and that is amplified when the generalizedwrongdoing allegedly occurred at a now-defunct bank. Inaddition, the lack of names is weird. How could the actionsalleged in the complaint have been accomplished if real peopledidn't do them?
Schneiderman's office also brought charges under a specificNew York State law called the Martin Act. The Martin Act doesn'trequire prosecutors to show that the defendants intended tocommit fraud. This seems ridiculous. If Bear employees committedthe acts detailed in the complaint, especially pocketing moneythat should have gone into investors' pockets, against thewarnings of lawyers and accountants, how can they have intendedanything other than fraud?
Which, of course, raises a few other questions. Chief amongthem: Why haven't Justice Department investigators broughtcriminal charges, and why hasn't the Securities and ExchangeCommission even brought civil charges? Technically speaking,both are also members of the Residential Mortgage-BackedSecurities Working Group, but both also have been conductingtheir own investigations since the crisis hit. The answer cannotbe that Schneiderman discovered something new.
JPMorgan has complained that his suit relies on "recycledclaims already made by private plaintiffs" and, well, it does.The notion that investment banks were knowingly putting badloans into securitizations has been public knowledge since thefall of 2010. That was when executives from a company calledClayton Holdings, which was retained by many of the big banks todo due diligence on the mortgages they were buying, told theFinancial Crisis Inquiry Commission that Wall Street knew thatalmost one-third of the mortgages they were securitizing didn'tmeet their own standards. Spitzer wrote a column for Slatecalling the documents the "Rosetta stone" because he thoughtthey provided such a clear road map for investigators. That'snot all. Schneiderman's predecessor, Andrew Cuomo, actuallyentered into a cooperation agreement with Clayton back in 2008!Did it really take over four years to put together a complaintthat doesn't even name real people?
As for the part about Bear pocketing money that should havegone to investors, that's been well known since at least early2011, when Teri Buhl did an in-depth piece for the Atlantic on alawsuit that bond insurer Ambac filed against JPMorgan in 2008,which was unsealed in early 2011. Buhl wrote that Bear traderswere "pocketing cash that should have gone to securitiesholders." And the Ambac lawsuit named names!
In other words, everyone has had plenty of time.
So there are a couple of possibilities. One is that Justiceand/or the SEC will follow up with their own charges now thatSchneiderman has laid the groundwork. Maybe. But that doesn'tmake a lot of sense given the widespread availability of theinformation in his lawsuit and the length of time that haspassed since the financial crisis. It's an old saw in legalcircles that the more time goes by, the harder it is to filecriminal charges. By now, it will feel strange if the JusticeDepartment yanks four people who worked at the old Bear and ineffect says: "You and only you are going to take the fall forthe entire financial crisis!"
Another possibility is that those who say that federalagencies simply don't have the appetite to pursue the banks areright. Whether that's because they lack the resources and thepolitical will, or because bringing criminal charges againstindividuals would inexorably lead up the chain to theinstitution, which would destroy it, and no one wants to seethat happen, it doesn't much matter. If Schneiderman's lawsuitis the best we can manage under those constraints, then that's atragedy.
A third possibility is that there's more nuance to whathappened than Schneiderman's suit allows. (JPMorgan, for itspart, has said it will contest the charges.) Some would stillsay that's all right, because if there are 50 shades of badbehavior, this is clearly one of them; so even if it's not thedarkest, let's make the bankers pay up. The problem is that it'snot the bankers who will pay. It's not the individuals who didthese awful things, or former Bear Stearns executives who mayhave sanctioned it knowingly or unknowingly, or even currentJPMorgan executives who will pay the big fine that will likelybe the end result of all this. It's JPMorgan's currentshareholders, which include mutual funds like indexers Vanguardand Wellington. In other words, we, the American investor class,are the ones who are going to pay. And if Schneiderman doesindeed apply this same method to other banks, well, then we'llpay even more. I fail to understand why this is justice, or whythis will do anything to dissuade bad behavior in the future.
I'm also bothered by what happened after Schneiderman filedhis suit. First, JPMorgan Chase raised a stink, because in theminds of many JPMorgan executives, they performed a publicservice by purchasing Bear and have already paid enough for itsmisdeeds. Maybe it's not fair to blame Schneiderman's office forresponding with a press release trumpeting the myriad ways inwhich JPMorgan Chase benefited from government assistance. Butwhether you love or hate the big banks, the alleged wrongdoingthat happened at Bear has nothing to do with whether or notJPMorgan Chase benefited from government help. The punishmentthe bank should face for any misdeeds should be purely a matterof law, not public opinion about the bank bailout. Otherwise, werisk bastardizing the law.
Finally, I worry that this is all a classic "watch thebirdie" exercise: Hey, folks, look over here at this facsimileof justice! Making the big banks pay somehow sure feels good,and if you don't look too closely, it may even distract you fromthe big questions. Namely, what should a financial institutionthat serves the needs of businesses and consumers-instead of onethat uses us as fodder for its own profits and executive bonuses- look like? And how do we get from here to there? Instead,we're going to pay up, and in exchange, get business as usual.That's not a good deal.
Keywords: MCLEAN JPMORGAN/