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Justice Department Probing JPMorgan Over Bear Stearns Mortgage Products

huffingtonpost.comFebruary 21, 2013

By Karen Freifeld and Aruna Viswanatha

The U.S. Justice Department is investigating JPMorgan Chase & Co over allegations that Bear Stearns provided misleading information about its mortgage products during the lead-up to the financial crisis, according to people familiar with the matter.

JPMorgan acquired Bear Stearns in a 2008 fire sale encouraged by the government, and has pushed back against various government suits that have sought to hold JPMorgan accountable for the failed investment bank's alleged mortgage-related misconduct.

In this investigation, civil lawyers in the Justice Department are looking into whether Bear Stearns altered due diligence information that third parties provided about the quality of mortgage loans packaged into securities, said the people, who were not authorized to speak publicly about the probe.

The investigation, which is in early stages, shows that enforcement authorities are still actively building cases amid criticism that institutions have not adequately been held to account for their role in causing the 2007-2009 financial crisis.

Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment. DOJ spokeswoman Adora Andy also declined to comment.

The Justice Department last year issued more than a dozen civil subpoenas to top financial institutions as part of an inquiry into the packaging and sale of home loans.

Pending inquiries at the Justice Department are largely an outgrowth of a state-federal initiative known as the Residential Mortgage-Backed Securities Working Group, which President Barack Obama announced during his 2012 State of the Union speech.

One of the co-chairs of the group, New York Attorney General Eric Schneiderman, already sued JPMorgan for fraud over Bear Stearns' packaging and sale of mortgage securities in the run up to the financial crisis.

It is unclear whether the recent Justice Department investigation into JPMorgan will result in enforcement action or might merge with mortgage-related probes by other agencies.

In a sign of how important the department appears to view these cases, the JPMorgan inquiry involves lawyers close to acting associate attorney general Tony West, according to people familiar with the matter.

West led the department's civil division until last February when he was promoted to his current post as the agency's third in command.

In another sign U.S. authorities are actively pursuing mortgage-related inquiries, the inspector general's office of the Federal Housing Finance Agency is hosting a training session this week with members of the RMBS working group, including federal prosecutors, members of the Federal Bureau of Investigation, special agents and others, a person familiar with the training said. The group has held several similar sessions in the past year, the person said.

 

Private Suits

The DOJ inquiry into the due diligence performed for Bear Stearns tracks accusations detailed in private lawsuits against the bank.

Bear Stearns hired Mortgage Data Management Corp to review a sample of loans in a 2006 mortgage securitization, according to a case filed against JPMorgan last year by bond insurer MBIA Inc .

Reviewers concluded that around one-third of the loans had serious credit and compliance problems, the lawsuit said.

But Bear Stearns altered the electronic spreadsheets to conceal the problems, according to the lawsuit, which was filed in New York State Supreme Court.

Bear Stearns removed 50 columns of information from the spreadsheet that showed the issues and then sent the altered report to MBIA, the lawsuit said.

In its answer to the MBIA complaint, JPMorgan denied the allegations that it had altered the spreadsheets. That case is pending.

 

Latest Legal Headache

JPMorgan has recently been hit by a wave of lawsuits over the conduct of Bear Stearns that appear to have some overlap.

New York's case, filed in October, accuses Bear Stearns of causing some $22.5 billion in losses to investors of mortgage-backed securities by failing to ensure the quality of the underlying loans.

In December, the U.S. credit union regulator sued the bank over $3.6 billion in securities sold by Bear Stearns.

And in November, JPMorgan paid $296.9 million to settle a case with the U.S. Securities and Exchange Commission that accused Bear of failing to disclose it had arranged discounted cash settlements with originators that left investors stuck with problem loans. The SEC also accused JPMorgan itself of overstating the quality of home loans that backed a $1.8 billion residential mortgage-backed securities offering it underwrote in 2006.

The bank's chief executive Jamie Dimon has said the bank is continuing to pay the price for doing "a favor" for the Federal Reserve in agreeing to rescue Bear Stearns.

The inquires are the latest legal headache for JPMorgan, which also faces separate investigations from a trading loss of $6.2 billion that sprung from a botched hedging strategy carried out in its London office, and inquiries into whether its traders manipulated benchmark interest rates.

(Reporting By Karen Freifeld in New York and Aruna Viswanatha in Washington; Editing by Karey Wutkowski and Tim Dobbyn)


Back to February 2013 Archive

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