Even though many readers have already read Matt Taibbi’s new article on how Attorney General Eric Holder acceded to Jamie Dimon’s efforts to squelch a criminal prosecution of JP Morgan’s securitization of toxic mortgages, I thought it would be useful to present the Democracy Now discussion of the story, particularly since the whistleblower, Alayne Fleischmann, discusses the case in her own words. Amy Goodman also asks Tabbi late in the broadcast about his departure from First Look.
You can read the transcript here. I wanted to add to this section:
ALAYNE FLEISCHMANN: Well, one issue I had is that although I warned not to securitize the loans, there was no way—I was blocked off, especially after I had raised complaints, from being able to see any of the data or the diligence process, which right there shows that something was wrong. So, after I left JPMorgan, I actually had no idea, for a full four years, that the loans had been securitized. On one hand, I was worried they would, but I really thought no one would ever actually securitize those loans.
MATT TAIBBI: This is an important distinction—
ALAYNE FLEISCHMANN: Yeah.
MATT TAIBBI: —because Alayne had no idea that a crime had been committed until she had concrete knowledge that the loans had actually been resold to somebody else. They’re certainly allowed to buy as many bad loans and as many risky mortgages as they want. It’s not until they go to some investor and represent to them that these are, you know, AAA-rated securities or whatever, or highly rated securities, that they’re actually committing fraud. And so, she had no way of knowing that. Even after she was laid off from the company, she had no knowledge of what actually happened. So she couldn’t actually report the crime yet, because she only saw one half of the deal.
I hate to say it, but that view of how JP Morgan could have committed fraud was insufficiently imaginative. Another route was stuffing investment accounts where the bank had discretion. As we discussed previously, JP Morgan’s second biggest private wealth client, Len Blavatnik*, lost $100 million on a $1 billion corporate cash fund across all his business entities. That fund had clear investment guidelines for the investments to be low risk and highly liquid. JP Morgan instead stuffed his portfolio with mortgage dreck when the bank was desperate to unload toxic mortgage paper. Blavatnik argued in a suit against the bank that htat was twice the level of real estate related assets permitted (that even before you get to the issue of the risk level). Blavatnik recovered half the amount he lost. I wonder how much better he would have fared had he had access to Alayne Fleischmann as a witness.
*Blavatnik was briefly a client of mine in the early 1990s.