Bear Stearns Reportedly Emails Suggest Bank Sold Clients 'SACK OF SHIX!!'

8/7/2019 Bear Stearns Reportedly Emails Suggest Bank Sold Clients 'SACK OF SHIX!!'

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Bear Stearns Reportedly Emails Suggest Bank

Sold Clients 'Sack Of Sh--': Report

The Huffington Post Lila Shapiro First Posted: 01/25/11 04:19 PM Updated: 01/25/11 04:27 PM

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A new lawsuit alleges fresh evidence of corruption at collapsed banking giant Bear Stearns.

The lawsuit -- filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JP

Morgan -- was unsealed last week, theAtlantic reports (see story below). The suit alleges that Bear

Stearns took extreme measures to defraud investors -- and that JP Morgan has been hiding the evidence

since it was first filed in 2008.

TheAtlantic neatly captures the nature of the game: "the lawsuit's supporting e-mails, going back as far

as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a 'sack of

shit.'"

According to theAtlantic, after selling the toxic mortgage securities, Bear Stearns traders would "then

sell back the bad loans with early payment defaults to the banks that originated them at a discount. The

traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it

should have gone to be distributed to the investors who owned the bonds." Thus, allowing the traders

to get paid twice on the deal.

Then, in 2008, when Bear Stearns collapsed and JPMorgan bought the remains, the bank covered up the

fraud, allowing executives to reap "tens of millions of dollars in compensation" from the deal, the suit

alleges.


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E-mails Suggest Bear Stearns Cheated Clients

Out of BillionsJan 25 2011, 1:01 AM ET By Teri Buhl for The Atlantic

Lawsuit alleges the bank took extreme measures to defraud investors, and now JPMorgan may be on the

hook

Former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of

America, and Ally Financial have been accused of cheating and defrauding investors through themortgage securities they created and sold while at Bear. According to e-mails and internal audits,

JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through

legal maneuvering. Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against

Bear Stearns and JPMorgan was unsealed. The lawsuit's supporting e-mails, going back as far as 2005,

highlight Bear traders telling their superiors they were selling investors like Ambac a "sack of shit."

They were selling investors like Ambac a "sack of shit."

News of internal whistleblowers coming forward from Bear's mortgage servicing division, EMC, was first

reported by The Atlantic in May of last year. Ex-EMC analysts admitted they were sometimes told to

falsify loan-level performance data provided to the ratings agencies who blessed Bear's billion-dollar

deals. But according to depositions and documents in the Ambac lawsuit, Bear's misdeeds went even

deeper. They say senior traders under Tom Marano, who was a Senior Managing Director and Global

Head of Mortgages for Bear and is now CEO of Ally's mortgage operations, were pocketing cash that

should have gone to securities holders after Bear had already sold them bonds and moved the loans off

its books.


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Mike Nierenberg, who ran the adjustable-rate mortgage trading desk at Bear and is now the head of

mortgages and securitization for Bank of America, was a key player ensuring the defaulting loans Bear

was buying would move off their books right after they bought them, with little concern for the firm's

due diligence standards. He was joined in this scheme by Jeff Verschleiser, his peer and Senior Managing

Director on the mortgage and asset-backed securities trading desk and head of whole loan trading. He is

now an executive in Goldman Sachs' mortgage division.

According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell

back the bad loans with early payment defaults to the banks that originated them at a discount. The

traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it

should have gone to be distributed to the investors who owned the bonds. The Marano-led traders also

cut the time allowed for early payment defaults, without telling the bond investors. That way, Bear

could quickly securitize defective loans, without leaving enough time for investors to do their own due

diligence after the bonds were sold and put-back any bad loans to Bear.

The traders were essentially double-dipping -- getting paid twice on the deal.

The traders were essentially double-dipping -- getting paid twice on the deal. How was this possible?

Once the security was sold, they didn't have a legal claim to get cash back from the bad loans -- that

claim belonged to bond investors -- but they did so anyway and kept the money. Thus, Bear was

cheating the investors they promised to have sold a safe product out of their cash. According to former

Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser

were the decision-makers for the double dipping scheme, and thus, are named as individual defendants

in the suit.

Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to Keith Lind, a Managing

Director on the trading desk, referring to a particular bond, SACO 2006-8, as "SACK OF SHIT [2006-]8"

and said, "I hope your [sic] making a lot of money off this trade."

It's this blatant internal awareness inside the Bear mortgage trading division that the Ambac suits says

led Bear to implement an across-the-board strategy to disregard its contractual promises and conceal

the defective loans. By JPMorgan taking over Bear, it became the successor of interest in Bear Stearns.

As the lawsuit lays out, JPMorgan is responsible for the flagrant accounting fraud started by Bear

designed to avoid, and has continued to avoid, recognition of vast off-balance sheet exposure relating toits contractual repurchase agreements. This allowed executives to reap tens of millions of dollars in

compensation from a bank that wouldn't have been able to buy Bear without tax payer assistance.

80% of Loans Went Bad Almost Immediately

In 2007, when Ambac started to realize something was very wrong with its high-rated bonds, it


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demanded Bear provide loan-level detail and reviewed 695 non-performing loans in its portfolio.

Ambac's audit concluded that 80 percent of the loans showed an early payment default. This meant

they should have never have been packed in the bonds Bear sold and were required to be repurchased.

Bear refused, and of course had already been pocketing buyback money for itself from the originators.

Bear also never told investors that its auditor Price Waterhouse and Coopers submitted an internal

review in August 2006 that this repurchase process was not in-line with its due diligence standards and

not typical for the industry. By January 2007, a Bear internal audit also reported the firm had collected

$1.7 billion in repurchase claims -- a 227% increase over the previous year. Yet Marano's group of

traders continued their double-dip payment scheme and kept selling the toxic loans with full awareness

of the poor quality of the due diligence.

Jeffrey Verschleiser even said in an e-mail that he knew this was an issue. He wrote to his peer Mike

Nierenberg in March 2006, "[we] are wasting way too much money on Bad Due Diligence." Yet a year

later nothing had changed. In March 2007, Verschleiser wrote to Nierenberg again about the same due

diligence firm, "[w]e are just burning money hiring them."

Then in November 2007, Verschleiser wrote to his risk committee that he knew insurers for mortgage

securities were going to have big financial problems. He suggested they multiply by ten times the short

bet he'd just made against stocks like Ambac. These e-mails show Verschleiser's trading desk bragging to

firm leadership that he made $55 million off shorting insurers' stock in just three weeks.

Eventually, as Ambac kept demanding a repurchase of the bad loans, Bear acknowledged in late 2007 it

would have to buy some back. The lawsuit lists over $600 million in claims with $1.2 billion in damages

from the soured mortgage securities it invested in and insured against. But according to the lawsuit, in

the spring of 2008, JPMorgan dismissed an outside audit review of the loans' need to be repurchased

and once again refused to pay Ambac. The suit asserts JPMorgan knew a repurchase would result in a

huge accounting liability that would put their balance sheet in serious trouble at that time.

The [put-back] issue is "not that material" for JPMorgan. -CEO Jamie Dimon

Last week, JPMorgan CEO Jamie Dimon said it will take years to get through mortgage litigation risk the

bank inherited and had set aside around $9 billion for litigation-related risk. Yet in the bank's January

earnings call, Dimon suggested that the bank may not have to buy back any soured mortgages from

private investors and said that the issue is "not that material" for JPMorgan. Still, Ambac recently won a

court order in December to add accounting fraud against JPMorgan to its suit, which can double or triplelawsuit awards. So it's hard to tell whether America's largest bank is prepared to pay for the sins of Bear.

JPMorgan did fight tooth and nail for the Ambac suit not to be made public, however, because the firm

argued it could damage the reputations of senior bank executives currently working in the industry.

Individuals named as defendants in the amended complaint include: Jimmy Cayne, Alan "ACE"

Greenberg, Warren Spector, Alan Schwartz, Thomas Marano, Jeffrey Mayer, Mary Haggerty, Baron

Silverstein, Jeffrey Verschleiser, and Michael Nierenberg. But the court chose to fold these individuals


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into the charges against JPMorgan as the case goes through appeal.

Ambac's lawsuit is led by Eric Haas of Patterson Belknap Webb & Tyler LLP. Depositions show internal

Bear executives saying Nierenberg and Verschleiser were responsible for deciding how much risk to take

when acquiring loans and for aspects of the securitization process. They reported up to Marano.

Testimony shows Marano would have known about the decisions his head traders were making. When

asked about these accusations, Nierenberg's, Marano's, and Verschleiser's current employers had no

comment. The defendants' lawyers at Greenberg Traurig LLP failed to respond to calls for comment.

A public hearing is currently scheduled to be held by the New York State assembly regarding whether

legal action should be brought against banks for misleading insurers about mortgage related securities.

If approved, the New York Attorney General will likely be asked to bring criminal fraud charges against

these banks. Now we must wait and see if JPMorgan will settle or go to trial -- or if the bank tries to claw

back tens of millions of dollars in pay from the former Bear executives.

Note: This post was updated to reflect the fact that, as this case goes through appeal, the individuals

named in the 12th paragraph have not currently been accepted by the court as individual defendants so

are folded into the charges against JPMorgan. However, on Tuesday afternoon sources told The Atlantic

that the Denver office of the SEC is now looking into the individuals involved in these charges.

In a separate lawusit insurance giants like TIAA-CREF and other investors are suing Bank of America's

Countrywide division for "massive fraud" regarding its holding of mortgage-backed securities (MBS)

Here is the May 2010 story----

More Corruption: Bear Stearns Falsified

Information as Raters Shrugged

May 14 2010, 2:25 PM ET By Teri Buhl for The Atlantic

Made up FICO scores? Twenty-minute speed ratings to AAA? If government prosecutors like New York

Attorney General Andrew Cuomo want answers to why the mortgage-backed securities market was so

screwed up, they should talk to Matt Van Leeuwen from Bear Stearn's servicing arm EMC.


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Reports indicated on Thursday that Cuomo is pursuing a criminal investigation surrounding banks

supplying bad information to rating agencies about the quality of the mortgages they signed off on. But

so far he hasn't been able to prove where in the chain of blame the due diligence for the ratings broke

down.

What Cuomo needs to establish is: whose shoulders does it fall on to verify the information lenderswere selling to investment banks about the quality of their loans? And who was ultimately responsible

for the due diligence on the loans that created toxic mortgage securities that were at the heart of our

financial crisis?

False Information and the Grey Area

Employed during the go-go years of 2004-2006, and speaking in an interview taped by BlueChip Films for

a documentary in final production called Confidence Game, Van Leeuwen sheds some light onto the

shenanigans going on during the mortgage boom that might surprise even Cuomo. As a former

mortgage analyst at Dallas-based EMC mortgage, which was wholly owned by Bear Stearns, he had first-

hand experience working with Bear's mortgage-backed securitization factory. EMC was the "third-party"

firm Bear was using to vet the quality of loans that would purchase from banks like Countrywide and

Wells Fargo.

Van Leeuwen says Bear traders pushed EMC analysts to get loan analysis done in only one to three days.

That way, Bear could sell them off fast to eager investors and didn't have to carry the cost of holding

these loans on their books.

According to two EMC analysts, they were encouraged to just make up data like FICO scores if the

lenders they purchased loans in bulk from wouldn't get back to them promptly. Every mortgage security

Bear Stearns sold emanated out of EMC. The EMC analysts had the nitty-gritty loan-level data and knewbetter than anyone that the quality of loans began falling off a cliff in 2006. But as the cracks in lending

standards were coming more evident the Bear traders in New York were pushing them to just get the

data ready for the raters by any means necessary.

In another case, as more exotic loans were being created by lenders, the EMC analyst didn't even know

how to classify the documentation associated with the loan. This was a data point really important to

the bonds ratings. When Bear would buy individual loans from lenders the EMC analyst said they

couldn't tell if it should be labeled a no-doc or full doc loan. Van Leeuwen explains, "I wasn't allowed to

make the decision for how to classify the documentation level of the loans. We'd call analysts in Bear's

New York office to get guidance." Time was of the essence here. "So, a snap decision would be made up

there (in NY) to code a documentation type without in-depth research of the lender's documentation

standards," says Van Leeuwen.

Two EMC analysts said instead of spending time to go back to the lender and demand clarification, like if

verification of income actually backed these loans, the executives at Bear would just make the loan type

fit. Why? One EMC analyst explains, "from Bear's perspective, we didn't want to overpay for the loans,


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but we don't want to waste the resources on deep investigation: that's not how the company makes

money. That's not our competitive advantage -- it eats into profits."

Twenty Minutes for AAA

It's easy to paint Bear as the only villain here -- but what were the rating agencies thinking?

Susan Barnes of Standards and Poor's testified before Congress last month saying banks like Bear were

responsible for due diligence in the transactions described above: "For the system to function properly,

the market must rely on participants to fulfill their roles and obligations to verify and validate

information before they pass it on to others, including S&P."

Yet, was it reasonable for agencies to stand behind ratings when due diligence was done by an affiliate

of Bear? That's like buying a car from a guy whose mechanic brother said it was great, and then finding

out it was a lemon.

Equally amazing was how responsive the raters were even on the big deals. Van Leeuwen says, "The

raters would provide a rating on a $1 billion security in 20-30 minutes." Describing it as "a rubber

stamp," Van Leeuwen said that the ratings agencies slavish devotion to their computer models "was

vital" because it allowed Bear to "cram mortgages through the process."

The greatest asset Bear had in its quest to squeeze every ounce of profit from the mortgage-backed

securities market was the methodology of the big ratings agencies. The bankers knew what kind of loan

detail was needed to get that coveted AAA rating. After they prepped the rating agencies for what they

'thought' the loans would look like, they would buy loans in bulk, and then spend a day scrubbing them.

Bear's decision to cut corners and to fail to take the time to make sure the raters got correct information

about the quality of loans was a big no-no. But rating bonds based on fast reactions, instead ofthoughtful analysis and reliable due diligence, also might place some responsibility on the agencies'

shoulders.


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Bear Stearns Reportedly Emails Suggest Bank Sold Clients 'SACK OF SHIX!!'

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