Last week, we saw a host of commentators rush to defend the mini October surprise of a sign of life from the heretofore moribund Mortgage Task Force, in the form of a filing by Eric Schneiderman against JP Morgan for fraud charges under New York’s Martin Act, even though we and others took a dim view of the suit. And even though a bit more information has come out, it doesn’t change our view that this and parallel cases (which the Mortgage Task Force has said it will launch) will be settled quietly, well after the election, perhaps even after Schneiderman’s current term expires, for comparatively little.
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.
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.
Now this might all sound impressive, save the Schneiderman filing was a bit too obviously cobbled together from other suits; Francine McKenna tells us it repeated an error in a filing by Ambac against JP Morgan, in which it mistakenly said Bear’s auditor was PricewaterhouseCoopers (in fact, it was Deloitte).
The fact that the Schneiderman salvo comes almost entirely from two other filings (Ambac and Syncora) matters. JP Morgan has been fighting them for nearly four years. As reader MBS Guy points out, the bank has put in thousands of hours into this case and almost certainly has deposed the Bear staffers that were involved. JP Morgan has gone into war of attrition mode on one case I know of against a very deep pockets party where the bank’s case looks pretty weak. It’s not hard to imagine that it would go this route if Schneiderman intended to put up a fight.
In the last few days, we have learned that the mortgage task force entered into tolling agreements with all the major banks, which means, contrary to our original assumption, they will be able to include actions back to 2005 (we had assumed they’d be subject to the Martin Act statute of limitation of 6 years, which would have limited the damages to late 2006 and onward conduct). While this in theory makes the economic value of the case higher, the fact is, as we pointed out, that Cuomo looked into this conduct in 2008 (the fact that mortgage originators ignored the reports of the firm hired to review mortgages, Clayton Holdings, that found many of the loans fell short of the standards promised to investors) and did nothing.
A tolling agreement, as Dave Dayen pointed out, is not given to DAs out of the goodness of the defendants’ hearts; it come out of a negotiation, which means Schneiderman had to give a concession….so what did Schneiderman and the task force concede to preserve cases that could have been filed years ago?
The real tell is in a tidbit Matt Stoller unearthed today, that Schneiderman is losing staff. From the Daily News:
Attorney General Eric Schneiderman has seen a mass exodus from his office in recent months, particularly in his communications shop.
The latest set to leave is press officer Michelle Duffy, who is going to work for Cuomo. She follows press shop alumni Danny Kanner and Dani Lever, who both left to join the Obama campaign, Jennifer Givner, who went to work for the Cuomo administration, and Lauren Passalacqua, who joined lame-duck Mayor Bloomberg’s press shop.
In addition, Blake Zeff, a former Hillary Clinton aide, quietly left recently to write about the presidential race, and several lawyers have also departed or are in the process of doing so, insiders said.
Several sources cited low morale in the office stemming from Schneiderman’s hard-charging chief of staff Neal Kwatra as at least a factor in some departures. But others said most who left went on to better or higher-paying jobs.
If Schneiderman were kicking ass and taking names, he wouldn’t be losing attorneys. The New York County DA’s office under Robert Morgenthau for over 30 years attracted top people on meager pay. The other jobs are “better” because Schneiderman is doing squat.