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Is Wall Street’s New Top Cop Overreaching in Fraud Suit Against JPMorgan?


It began with Eliot Spitzer in 1999, was perfected upon by Andrew Cuomo starting in 2007, and has now been utilized by Eric Schneiderman for the past 2 years. What these three men all share in common is that they are not only the last three Attorneys General for the State of New York, but how they use this high-profile position to pursue high-profile civil lawsuits to rectify what they feel are corporate injustices.

The latest example of this legal trilogy's tactics came just yesterday in the form of a multi-billion dollar civil fraud lawsuit against JPMorgan (JPM) for mortgage-related securities sold seven years ago by Bear Stearns, which JP Morgan points out it "acquired over the course of a weekend at the behest of the U.S. Government" amidst the financial crisis of 2008.

For its part, the nation's biggest bank has promised to fight the allegations, but in the attached video my co-host Jeff Macke and I question the timing, merits and consequences that this mega lawsuit might carry. While we fully support the rule of law and are certain that JPMorgan will survive, it is hard not to ponder if the town's new top cop hasn't over-reached and if his belated blow won't carry counter-intuitive ramifications that have the opposite desired effect.

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To be fair, Schneiderman's case is not entirely of his own making since it is the first action taken by a Federally formed task force, known as the Residential Mortgage-Backed Securities Working Group, which was created by President Obama in January to investigate the practices carried out during what he rightly called an "era of recklessness."

The problem is, that era is gone and seems like ancient history at this point. The time to punish the wheelers and dealers has long since passed. The window to affect meaningful change in the financial and banking industries has closed. In short, as culpable as our big banks might be, after three stress tests, four documentaries, five years later and an Occupy movement, America has simply moved on.

To haul us back now to those dark days of yore seems not only outdated, by potentially harmful. Who will be served by such backward-looking litigation, other than the politicians and barren state coffers that are in need of a cash boost?

Aside from what will most likely end up as a negotiated (and hugely discounted) settlement, Macke and I also can't help thinking that this action, as well as other civil suits that are expected to follow it, can only serve to distract management, further tighten already tight lending, and ultimately drive up fees and charges that are high and rising.

While some will argue that such moves are overdue and go a long way towards sating the public's appetite for accountability, the risk is that dredging up the past will actually come at the expense of our future.