Report Says: Bear Stearns Executives Sold Illegal RMBS and Covered It Up

Former back office employees from Bear Stearns are coming out of the woodwork to explain how Tom Marano’s mortgage group cheated their own clients out of billions. This week I reported at The Distressed Debt Report, EMC insiders say they were told to make up the classification for whole loans, packaged into mortgage securities, to get them switched out of the trust. By classifying the loans as ‘prepaid’ or having ‘subsequent recoveries’ Bear employees were able to fool the trustee into giving them back loans they were not able to legally service. A move New York Attorney General Eric Schneiderman is actively investigating now.

In my latest Distressed Debt Report story we hear from EMC staffers who describe how subprime loans, that would have been sold by Bear Stearns trader Jeff Verschleiser’s team, never had a proper servicing license in West Virginia when they were packaged into the residential mortgage backed security. In 2003 Bear/EMC put $100 million of subprime loans from West Virginia into a few RMBS transactions. EMC, the banks wholly owned mortgage servicing shop, would service all of Bear’s RMBS after they were sold.

A year latter, after senior executies realized the mishap, instead of Bear Stearns going out and informing their regulator or applying for a license, they orchestrated a cover up and even threaten EMC employees not to talk about it. Verschleiser was the head trader for the subprime desk reporting directly to Tom Marano. Marano was the head of mortgages for the bank. Verschleiser now works for Goldman Sachs and Marano is CEO of ResCap a division of Ally Bank.

Bill Singer, a former federal regulator attorney, reviewed the whistleblower testimony for us and had a few choice words on the potential legal problems Bear/EMC has as a result of the subprime loan swaps.

“First off, the inclusion of West VA loans into the RMBS might constitute a material misrepresentation in written offering documents and would certainly raise questions as to whether the deal was properly “Blue Skied” if EMC was not licensed to service the West VA loans,” says Singer who also writes about legal issues at his popular blog Broke and Broker.

Singer sees the failure to timely disclose this to the Trustee could constitute fraud to the extent it was a material omission and that the law imposes an ongoing obligation upon Bear to timely notify the Trustee of any subsequently discovered noncompliant facts.

“What constitute a troubling twist and potentially exacerbating factor, is that upon recognizing the lapse, EMC (and possibly in “conspiracy” with Bear and/or others), may have willfully enlisted the assistance of an individual who was deemed pliable and vulnerable to pressure, and such pressure may have been directly or indirectly exercised in a manner that was calculated to conceal or to further the non-disclosure of the West VA issue. Such conduct could raise questions as to whether it was calculated to “obstruct justice” or to impede/interfere with regulatory/criminal investigations,” says Singer.

We need to recall that a few years ago Bear Stearns Companies, LLC and its subsidiary, EMC Mortgage Corporation paid $28 million to settle Federal Trade Commission charges that alleged unlawful practices in servicing consumers’ home mortgage loans, particularly misconduct pertaining to misrepresentations about sums owed, undisclosed/unapproved fees, and collection abuses.

Singer point out, “As such, Bear/EMC are not particularly lovable companies these days and given Bear’s demise and the upcoming election, we should expect that politicians and aspiring prosecutors may find firms such as Bear/EMC to be particularly popular targets.”

J.P. Morgan who bought Bear Stearns and EMC in 2008 also assumed litigation risk. It’s JPM’s deep pockets that institutional investors in Bear’s RMBS are counting on paying out billions in damages for the actions of these dubious Bear executives. Stay tuned because the New York A.G. questions don’t appear to be ones JP Morgan can delay or ignore. There’s an old saying that you don’t get in trouble so much for what you are doing as for what you have done — and this is a perfect example. These things have a way of catching up with you over time.

Editor’s Note: You can buy a single copy of my story at The Distressed Debt Report. If you are an investor in any of Bear Stearns RMBS I think it’s worth it.