President Obama's mortgage fraud task force, set up at the beginning of the year to snuff out illegal practices that occurred during the height of the U.S. financial crisis, finally brought its first big case Monday.
JPMorgan Chase (JPM) has been slapped with a $2 billion lawsuit, one that alleges fraud in the residential mortgage-backed securities operations at Bear Stearns, which at the time was an independent firm, during 2005 into 2007.
The 31-page suit was filed by New York Attorney General Eric Schneiderman, who is also the co-chair of the Residential Mortgage-Backed Securities Working Group, the investigators who are examining mortgage practices. According to the suit, Bear Stearns led investors to believe that it "had carefully evaluated -- and would continue to monitor -- the quality of the loans" in the residential mortgage-backed securities, or RMBS. This suit contends:
"In fact, Defendants systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans. Furthermore, even when Defendants were made aware of these problems, they failed to reform their practices or to disclose material information to investors. As a result, the loans in Defendants' RMBS included many that had been made to borrowers who were unable to repay, were highly likely to default, and did in fact default in large numbers."
While some may see the lawsuit as long overdue -- to date, big banks have faced few civil cases and no criminal cases -- other may see it as ill-timed, for a couple of reasons. First, JPMorgan bought Bear Stearns in 2008, after the alleged fraudulent behavior, and it did so with the broad support of the U.S. government during the financial crisis. Second, the U.S. presidential election is just weeks away, and the case could been seen as a political ploy to show President Obama is tough on Wall Street.
John Mauldin, president of Millennium Wave Advisors and author of "Endgame: The End of the Debt Supercycle and How It Changes Everything," joined The Daily Ticker's Aaron Task to discuss the suit. Mauldin said he was surprised at how long it's taken to finally bring such a case after U.S. taxpayers laid out nearly a $1 trillion to bail out all the big banks.
Mauldin says more needs to be done to prevent Wall Street's "nuclear" and "toxic" practices that put customer funds at risk, but he doesn't feel especially sorry for JPMorgan simply because it acquired Bear after the yeron which the government probe is focused.
JPMorgan plans to contest the charges, and a bank representative told The New York Times it was "disappointed that the New York A.G. decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record — instead relying on recycled claims already made by private plaintiffs."
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