It looks like Eric Schneiderman is living up to his track record as an “all hat, no cattle” prosecutor. Readers may recall that he filed a lawsuit against the mortgage registry MERS just on the heels of Obama’s announcement that he was forming a mortgage fraud task force. Schneiderman’s joining forces with the Administration killed the attorney general opposition to the settlement, allowing the Administration to put that heinous deal over the finish line. The MERS filing was a useful balm for Schneiderman’s reputation, since it preserved his “tough guy” image, at least for the moment, and allowed his backers to contend that he had outplayed the Administration.
By contrast, we were skeptical of the suit, both in timing and in substance, and thought it had substantial hurdles to overcome. Indeed, despite invoking an impressive-sounding $2 billion in lost recording fees and other harm, the suit settled for a mere $25 million (you have to love Schneiderman’s pushback; this was a “partial” settlement. Puhleeze. We’ve been told by lawyers who aren’t pro bank that the judge assigned the case was not buying what Schneiderman was selling, and the claim that he has residual claims he can pursue, while narrowly true, is pretty desperate).
Schneiderman has churned out another lawsuit that the Obama boosters and those unfamiliar with this beat might mistakenly see as impressive. It’s a civil, not criminal suit against JP Morgan he conduct of Bear Stearns in originating and misrepresenting $87 billion of mortgage backed securities (the link takes you to the court filing). And also notice no individuals are being sued. Being a banker apparently means never having to be responsible for your actions.
There is nothing new here; this claim is cobbled together from other litigation and investigations. And to add insult to injury, the damaging information has been in the public domain for years. There are two overlapping sets of issues described in the claim. First is that Bear was telling investors in its marketing materials and public filings that it had a robust due diligence process, when it in fact it purchased loans that were delinquent or otherwise failed to meet stipulated underwriting standards and sold them into securitizations. The filing depicts Bear as aggressively seeking to increase its origination volumes and regularly ignoring the findings of outside firms and its own quality control team regarding substandard loans. Well, take it back, there does seem to be something original here: Francine McKennal noted the complaint named the wrong auditor (hat tip Matt Stoller).
Second, rather than repurchase loans that should not have been included in securitizations, such as ones that defaulted early, Bear would instead extract settlements from originators, which it retained rather than pass them on to the securitization trusts. Note that while the filing discusses how this practice unjustly enriched Bear, it completely misses another motivation. It wasn’t just to “preserve its relationship” with these originators, it was to preserve them, period. Bear had warehouse lines with mortgage brokers and originators like New Century. If it put back too many loans, it would bankrupt them, exposing Bear to substantial losses on these loans. Effectively, Bear was in so deep that it had no way out other than to keep dumping toxic product into securitizations.
So what’s wrong with this suit? There is no reason it could not have been filed in 2011, if not sooner. The discussion of the fact that Clayton Holdings, the independent review firm for the major investment bank originator/packagers, routinely found significant levels of defects in the loans it reviewed, came out in the FCIC investigation and the evidence was made public on the FCIC website (as well as given considerable attention in the financial media). Representation and warranty suits against the major issuers have made similar claims. In particular, Ambac set forth the allegations that Bear and its subsidiary extracted concessions from originators for defective loans but pocketed them rather than passing them on in January 2011. Isaac Gradman of Subprime Shakeout wrote a compelling post on the “bombshell” of its amended complaint.
The delay considerably reduces the value of this suit. Schneiderman cites two causes of action, both of them subject to six year statute of limitations. This means that the only mortgages that would be eligible would be in deals from October 2006 to the end of the subprime mania, June-July 2007 (and recall that the market was deteriorating in January 2007, in free fall in February, and rebounded in March, so it isn’t even 9 months of origination, it’s more like 6). By contrast, the toxic phase of subprime started in third quarter 2005 and the complaint cites behavior dating back to 2005, and most laypeople would incorrectly assume that would assume mortgages originated then would also be included.
What makes this particularly galling, as MBS Guy points out, is the previous attorney general, Andrew Cuomo, was on this trail in 2008 and granted immunity to Clayton and conducted his own investigation. Cuomo chose to do nothing in the end. Schneiderman chose only to dust it off when it was politically useful and what value it has is largely dissipated. And notice despite the media spin that this action came out of the mortgage task force, none of the other Federal agencies involved (the DoJ and the SEC) are filing parallel actions. We were told by Administration loyalists that the fact that the statute of limitations for Federal securities law violations, which is five years (it’s a bit more complicated but that’s a not bad generalization) was not a big problem since the Feds had lots of other causes of action with 10 year statute of limitations, such as mail fraud and wire fraud. Hhhm, guess those aren’t as useful as the Administration’s defenders would have you believe.
However, the usual cheerleaders are touting this action as significant and anticipate other suits will follow. More cookie cutter suits of this order are nuisance-level for the banks and will be settled after the election, when voters hopefully won’t notice if the results fall short of the grandstanding. In many ways, filing suits that generate settlements vastly lower than the actual harm they did are worse than not acting at all. They will serve to reinforce the false Obama narrative that it’s just too hard to go after the banks, while the timing and the half-heartedness of the effort will correctly stoke criticisms by bank allies that this is just a politically motivated shakedown operation. As we’ve said before, Obama believes that every problem can be solved by better PR, and this looks like one in a long string of examples.