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San Bernardino County Backs Down From Shoddy VC Plan Using Eminent Domain

A Southern California government official from a depressed county tried to go up against Wall Street this summer when he shocked the mortgage bond community by telling them he was thinking about using eminent domain to force-buy underwater mortgages out of the securities at a discount. That man was Greg Devereaux, a former city planner, who is the appointed CEO of San Bernardino County located in the Inland Empire of Southern California. It’s one of the largest counties in the state who had one of it’s larger cities file bankruptcy last year. On Thursday at a public hearing Devereaux did a bit of a 180 and basically said he couldn’t take the risk of using eminent domain because Wall Street would attack it and his constituents were voicing they really didn’t want to do it.

I was on the ground for six weeks this summer following the hearings and community reaction in the county. Viewers of RT’s Keiser Report saw me explain how these good-hearted muni officials were about to get bamboozled by a San Francisco venture capitalist with a firm call Mortgage Resolution Partners. What we were really faced with was two finance groups duking it out over profits with financial screwed homeowners as the sucker in the middle. MRP played San Bernardino’s heart-strings by promising to clean out the abundance of underwater homes in the county that were keeping real estate recovery at a stall.

Except as I exposed on Keiser Report, MRP was really just setting themselves up to make a double-digit profit if they could get Devereaux to break contract law and buy the underwater mortgages at a discount to their value within the mortgage bond. Meaning RMBS holders, which include pension funds, could get their investment wiped out. By breaking contract law San Bernardino County risked high borrowing rates via banks afraid to do business with anyone in the county going forward. The kicker was MRP wasn’t going to buy mortgages with borrowers who were not paying; instead they wanted the cream of the crop, the paying overvalued mortgages, so they could off load them down the road to the FHA or GSE’s. There wasn’t a lot of risk for MRP in the plan but there sure was for the local residents.

San Bernardino County spokesperson David Wert wrote in an email after the vote to drop eminent domain:

“Board Chairman Greg Devereaux pointed out many experts have warned the use of eminent domain would destabilize an already weak local housing market and even worsen the mortgage crisis. At the same time, very few local homeowners and other stakeholders expressed support for the use of eminent domain. Many, in fact, opposed such a strategy.”

When the plan was first presented the local Inland Emprie press and liberal media like Huffington Post were working like public relation dogs for MRP. Glossing over the fine print details of how a homeowner could get totally screwed if their loan was bought via eminent domain. But as my peers in the financial press picked up on what was really going on and we saw Reuters to the Wall Street Journal writing about the evil pitfalls residents would face and it got local business owners, real estate agents, or homeowners not underwater really worried.

Devereaux says he never fully committed to do MRP’s plan but he did think it was worth telling his residents about so a public debate could happen. That debate turned into a somewhat union ball breaking style of backroom convos by the wall street lobby groups with relators and homeowners across the county. Devereaux’s office told me SIFMA even threaten them ‘not to talk about eminent domain publically’ or all holy hell would break out for their local economy. That threat didn’t bode well with progressive minded Devereaux who thinks governments job is to share openly with it’s resident (shocking right). The county was hoping at some point data would come out that showed the plan was good for the community as a whole but bad data kept showing up in the press that made Devereaux look like he’d be Darth Vadar leading the evil empire if he just started condemning mortgages with his power of eminent domain.

San Bernardino County has some of the poorest neighborhoods in southern California mixed in with a few gem upper middle class cities like Lake Arrowhead and Redlands. Cites that didn’t allow a housing boom in the last decade and were not packed with underwater homeowners.

These cities are not particularly populated with people who understand high finance like you’d see in Fairfield County, CT but they are college educated, often Republican, and had to do some quick education on how a mortgage bond security worked. The best thing MRP did by coming to town was educate San Bernardino County residents how high finance products work so they can make better decisions the next time a stranger shows up looking like a healer with a quick fix plan to ‘help’ their troubled economy.

Devereaux said at the last hearing even he got an education from bond lobby groups like SIFMA and SIFMA sure now knows where San Bernardino is now. The county is still seeking housing fix proposals from the private sector–this time they will ask for firms to included a risk assessment in their plans. Good for Devereaux.

As for MRP they put out a spin statement this week that said in the last year they’ve talked to around 30 cities who are still entertaining their eminent domain housing plan – although Chicago has also turned them down. Tad Friend at The New Yorker was able to follow Steven Gluckstern of MRP around late this summer and detailed how a northern cal town, Salinas, was interested at first but after news reports started to show flaws and consequences to his plan they backed down.

I found it interesting Gluckstern choose a journalist, Tad Friend, who doesn’t have a history of reporting on high-finance or wall street firms to cover his agenda. Friend is a good story teller who was able to quote Gluckstern admitting the homeowner would not have a choice if their home was bought out of the RMBS via eminent domain. A glaring fact that hadn’t been reported yet. The New Yorker also doesn’t tell the reader where some of their bold statistical statements come from. Such as “yet even as homes prices have risen for six of the past seven months, twenty person of America’s homeowners remain underwater”. That kind of statement is just to broad and the reporter should know he needed to source in the story where that data comes from so the reader can judge its accuracy. (Friend has now answered he used corelogic numbers for his story but I think it should have been stated in the print) This is the kind of thing we saw Gluckstern do all last year. Throw up numbers that reporters had to go back and fact check. Jon Prior at Housingwire found his number of underwater homes for San Bernardino County included Riverside, which is not in San Bernardino County, and his 60% underwater projection was really only a 43% number according to corelogic.

America is founded on free market capitalism. It’s interesting to watch who’s still fighting to keep that alive these days.

Editors Note: I grew up in a resort mountain community called Lake Arrowhead that is in San Bernardino County. I haven’t lived there in near 20 years but I applaud its residents for doing their homework and using their voices to stop a plan they didn’t think would benefit their community. It was also refreshing to see that government listened to them.

Frontline: The Untouchables – Exposes how Wall Streeters Commit Fraud but Escape Jail

UPDATE 1-23-13 5pm: The Washington Post is reporting the DOJ’s Lanny Breuer, who was highlighted in The Untouchables, is stepping down. Now reporters had heard he was on his way out for a bit so WAPO could be reporting old news but it sure makes the Frontline film and my reporting seem to have made quite a stink at the DOJ today. Is this a case were great investigative journalism actually went to work for the American people?

1-23-13: There is a live chat with The Untouchables film maker Martin Smith today. I’d ask him if he thinks DOJ’s Lanny Breuer should still have his job.

Original Text
Tom Marano and his team of bandits at Bears Stearns mortgage trading desk took Wall Street for a ride in the last decade. I first broke news about them stealing billions from their own clients, which included pension funds, in January 2011 for The Atlantic. Tonight you’ll see how widespread their action went in a Frontline documentary film called The Untouchables.

Emmy winning documentary film maker Martin Smith contacted me this summer about my reporting on the Bear Stearns traders and the saga it entailed for JP Morgan. A bank who is now facing a Civil fraud suit by the NY AG, has $140 billion in civil RMBS fraud suits against them, and has setteled with the SEC for the double dipping scheme that attorney Eric Haas at Paterson Belknap first figured out.

When I first came about this story in early 2010 Reuters and Fortune, who asked me to pitch them, passed on it because they said the topic was too complicated. But it took only 24 hours for Dan Indivilgo (who is now writing for Reuters BreakingViews) to figure out this was a blockbuster piece of reporting and as a business editor at The Atlantic he convinced them to buy it. I only made $150 selling the story to The Atlantic instead of the few thousand dollars I’d make if I had sold it to a trade publication behind a paywall but I knew this story just had to printed online for the world to read. And they did.

Hundreds of Wall Streeters started to email or call me after they read it. People who might have never read my byline at the New York Post or Hearst Newspapers were calling to see what else I had on the outright fraud these financial titans committed. Their big takeaway was “I knew those Bear traders were always making too much money but I could not figure out how.” And the civil securities lawyers who called just wanted to play catch up to the sordid details the lawyers at Patterson Belknap had already figured out for their clients the mortgage bond insurers. Even the FHFA had an analyst call me to find out behind the scenes info and then copied Patersons Belknap’s suit when then filed for around $22 billion in civil fraud against JP Morgan.

You can see whistleblowers on camera tonight telling details I first reported about the level of due diligence Bear (and other banks) hired to mask the level of out right fraudulent loans the traders were aware of before they even put them into the mortgage securities they sold to the public.

Yet still we saw the NY AG only sue for civil fraud and not criminal fraud. Filmmaker Martin Smith got people to admit the DOJ was afraid if they actually charged these Wall Street bad boys with criminal fraud it would rock the financial system. An absurd notion for the DOJ to even consider. They are not bank regulators or butt boys for the banks like Tim Geithner. They are suppose to go after crime regardless of how it effects an industry. I consider this fraud against the American people– the DOJ didn’t do their job when the evidence was handed to them by reporters like me and Nick Verbitsky and sharp lawyers like the team at Patterson Belkanp.

But the real want-to-make-me-throw-up moment in the film came when I saw the DOJ’s Lanny Breurer tell Martin Smith he didn’t think journalist had found any whistleblowers who the DOJ hadn’t already interviewed. That’s was either an out right lie or he’s really in denial because as Nick Verbitsky said in the film he knows his unnamed whistleblowers were never contacted by the DOJ even though the lawyers at Paterson Belknap eventually got some them on the record for their civil suit against Bear Stearns/ JP Morgan. I second that…the DOJ has flat out not tried to reach a single whistleblower in my series of reporting on Bear Stearns/ EMC / JP Morgan.

The failure of the DOJ is the real crime we should never forget.

Editors Note:This news publication is funded by the generous donations of my readers. If you like what you saw in the Frontline Film or news report you see on this site please donate. You can do so via Paypal at teribuhl@gmail.com. Micro donations of $25 plus go a long way when readers like you contribute.

Regulators Investigate Sun Trust Bank for Fraud

UPDATE 10-11-13: SunTrust was forced to settle with the government over the actions in this story which was first reported at Growth Capitalist. They had to pay over $1 billion dollars which lead to a negative 33 cent per share hit to earnings. It’s unclear if the whistleblowers will reap any reward from this sizable settlement.

UPDATE: You can see me talk about my Sun Trust investigation on RT’s top TV show Keiser Report today. Max Keiser also interviews me about the impact of the SEC investigation into JP Morgan – which I first reported on his show last year.

Original Text
A mid-size bank touted as a growth stock by analyst this year is under SEC investigation for selling billions of Alt-A loans labeled as Prime loans to Fannie Mae. I reported on the SEC investigation into SunTrust Bank on November 5th at Growth Capitalist.

According to whistleblowers, Atlanta-based SunTrust took advantage of a Fannie Mae program designed for the bank’s best of the best borrowers. They called it the Agency Shortcut Mortgage. In 2006, with pressure to keep earnings up as banks like Countrywide were laps head in earnings from resi mortgage origination, borrowers with good credit scores became a target for fraud by SunTrust. The bank needed high credit scores to get entry into the Agency Shortcut Mortgage program but after that SunTrust staff could manipulate the income and assets of the borrowers and force the GSE program to buy the loan. The whistleblower complaint alleges SunTrust did this in the billions from 06 to early 08.

Whistleblowers claim the highest level of management was directing the retail arm, wholesale, and outside mortgage brokers how to beat the Fannie Mae program and were encouraged to re-enter borrower income or assets over and over until the loan qualified. These whistleblowers say, once it was accepted in the Shortcut program underwriters were not allowed to ask for follow-up stated income docs like tax returns and bank statements. That’s because the Shortcut approvals were being done by SunTrust loan officers, branch managers, & mortgage brokers who were paid on volume instead of the bank’s underwriters who should have been hitting the approve button. These SunTrust interested parties basically circumvented the underwriting process by committing automated underwriting fraud. The result was Fannie thought it was buying tons of great prime loans from SunTrust.

It wasn’t till early 2008–right before the Shortcut program was terminated–that Fannie Mae limited the number of times their DU system could be re-run for a particular borrower to fifteen. While fifteen seems high Fannie took into consideration the number of hands that touched a loan from origination to funding. Subtle changes are often made in the underwriting process but the goal of Shortcut was to cut down on the detailed document request underwriters usually did. What this highlights is the laddering of income and assets loan officers were doing on Shortcut loans to achieve the ‘right mix’ that tripped Fannie’s DU system into approving the Shortcut loan–an abuse that must have been clear to Fannie executives who oversaw Shortcut. This questions the very core of Fannie’s system of risk controls along with how much their CEO, Daniel Mudd, knew about the health of his bank and didn’t disclose to shareholders.

SunTrust whistleblowers worked for a year to find a lawyer to get their case in front of U.S. regulators. The thought that the bank intentionally planned to cheat Fannie’s computerized underwriting acceptance program so they could improve origination volume was hard to sallow for a bank that’s managed to escape regulatory sanctions so far. I’ve watched whistleblower complaints filed for years now and the SEC will often sit on them for a long time before they start to investigate but with SunTrust the regulator got involved within only a few months. That’s because the mortgage fraud task force was already aware of other large residential mortgage originators doing the same thing. We saw proof of this when the DOJ acted last month and sued Bank of America for the sins of Countrywide’s ‘Hustle program’ with the GSEs.

Banks cheating to earn profits isn’t a new concept for main street to understand but how the Government Sponsored Entities allowed themselves to be cheated opens a whole other can of worms. In my report , at Growth Capitalist, we show a former regulatory enforcement lawyer discuss how and why Fannie isn’t the innocent victim here. On top of that think of the mortgage insurance that was sold alongside these loans which didn’t factor in enough risk. Then there are the second loans place on top of these Shortcut loans that another lender would have thought they were lending against after a prime loan was issued but instead it was a lower quality loan.

SunTrust told investors in September they thought they were through GSE putbacks and added hundreds of millions more to their putback reserves. But my story at Growth Capitalist questions how that could be true when they are faced with an SEC settlement on billions in loans executed with fraud. The bank’s Q3 earnings presentation shows putpacks have been requested on over $6 billion of resi loans with most coming from the GSE.

Editors Note: My story at www.growthcapitalist.com is behind a paywall that only paid subscribers can read. Great investigate journalism is with worth paying for and there are a ton more details in the story that make the subscription worth it.

Where the SEC Puts the JP Morgan-Bear Stearns Settlement Matters

JP Morgan disclosed they reached an agreement with the SEC today for the double-dipping scheme run by Bear Stearns mortgage traders. This was where the traders under Tom Marano kept billions of dollars that were supposed to go back to RMBS investors when resi-loans defaulted in the first 90 days. The SEC hasn’t officially accepted the deal yet and a court still has to approve it so we have ZERO info on how much Jamie Dimon’s bank has to pay and if there are any punitive damages.

Unfortunately with SEC settlements the bank doesn’t admit any wrong doing. So what’s important to watch here is where the SEC slots the funds. Will they place millions in their general fund or will the money go into something called a ‘fair fund’. Sarbanes-Oxley actually gave the SEC a mechanism to create a fund for aggrieved investors so they can get some restitution dollars back. In all fairness any money the SEC gets out of JP Morgan should be put back into the RMBS trust and paid out according to the waterfall for each security. It would be a little complicated to do but hey it’s the SEC and I’m sure they can hire a forensic accountant to sort it out. If that happens then the state and federal judges ruling on $140 billion of rmbs civil suits against the bank (it went up $20 billion in Q3 according to their 10-Q filing) could see it as an admission of guilt, which would really bolster the civil suits with fraud claims who are subject to triple damages.

Sadley we are not expecting JP Morgan to be fined by the SEC anywhere near the billions they should be. The bank’s 10-Q shows they only added $700 million to their litigation reserves in Q3 for a total of up to $6bn over what they have already expensed.

A few naive reporters have written stories today that the SEC settlement shows JP Morgan is getting out of the woods from its rmbs fraud and putback suits but it’s actually the opposite. The SEC’s suit doesn’t affect the billions the NY AG is trying to suck out of JP Morgan for the same crimes—he did sue for around $22 billion. But JPM’s real worry comes in the hefty payout they will have to pay when they settle with the monolines, institutional investors, and even the FHFA who sued for Fannie Mae and Freddie Mac. JP Morgan has been fighting some of these rmbs fraud cases for five years now and a few are set for trial next year.

Today’s news is really about Jamie Dimon finally admitting Bear Stearns traders did something really wrong to its own investors and JP Morgan is going to have to pay a lot for it.

Update 11-13-12: The WSJ is still running PR for Jamie Dimon and yesterday tried to tell readers that Bear Stearns executives won’t and shouldn’t be charged criminally. This is beyond embarrassing for the WSJ reporters as viewers of RT’s Keiser Report know I’ve been explaining for two years how much evidence the DOJ would have if they wanted to charge Tom Marano and his team. Nick Verbitsky, documentary film maker of the Bear Stearns movie ‘Confidence Game‘ even commented on the absurd reporting by the WSJ. It’s clear we are not going to get any decent reporting or analysis out of the WSJ but Reuters legal columnist, Alison Frankel has a great analysis on why JP Morgan is likely to pay billions in RMBS putbacks because of Bear’s fraud. Read it and you’ll see why setting aside even $6 billion in litigation reserves isn’t enough for $JPM.

Told You So: SEC Wants JP Morgan to Pay for Bear Stearns Sins

Last night the Financial Times broke news Jamie Dimon is willing to admit that maybe the Bear Stearns mortgage traders really did break securities laws and he should settle with the Securities & Exchange Commission. What the FT forgot to mention was I was the lone reporter in late January 2011 who reported JPM was under SEC investigation for this. A story I continued to report and warned on for the last two years at DealFlow Media and on RT’s top financial news show Keiser Report.

Most of my peers in the financial press have been afraid to report on this story. Even when JP Morgan admitted in their own 1st quarter filling this year that they’d received a wells notice –which means their regulator told them they are going to be sued if they don’t settle. Once again a series of my reporting on a financial institution committing fraud was proven right. The only thing I don’t know is how many millions the SEC will accept as settlement for these crimes against Bears own investors. The amount of dollars JPM pays the SEC isn’t that important though because the simple fact that they are willing to admit it wasn’t ok for Bear Stearns traders, under Tom Marano, to steal billions from their own clients gives the $100 billionish in civil rmbs fraud suits, filed by investors, a huge negotiating advantage.

The WSJ wrote today that people close to the SEC settlement talks told them the investigation was over, “whether Bear Stearns got compensation from lender for bad loans it had purchased to bundle into mortgage-backed securities, but then failed to pass that money on to investors by putting it into the trust managing the securities.” The WSJ actually learned about this when I first went on Max Keiser’s show last year, multiple times, and told his millions of viewers this is what the SEC was investigating. Then the WSJ read my story in May about JPM getting a Wells Notice.

A sad fact to the state of journalism in covering this story is Tom Marano, Mike Nierenberg, and Jeff Verschielser’s attorneys have done a good job of keeping their names out of the press. The day I broke my first story on the subject at The Atlantic we actually reported an update to the story that the SEC was investigating. That’s because I was able to confirm the SEC called people involved in the situation and started to interview them the day I reported the story. It ran for about 24 hrs and then I watched a pr man from Bank of America, where Nierenberg is head of mortgages, run interference with The Atlantic’s top editors and the SEC update was taken down. A pathetic reaction by the senior editors at The Atlantic.

Max Keiser at international TV network RT trusted my reporting and printed on his website the SEC was now investigating for all the illegal actions I’d just reported. Then my editors at DealFlow Media encouraged me to continue to report out the Bear Stearns traders story at their trade publication The Distressted Debt Report. Jody Shenn at Bloomberg copied some of my reporting on the subject but then dropped off the story. In fact it was really only me and a talented legal columnist at Retuers, Alison Frankel, who continued to report on the impact of the rmbs fraud litigation against JP Morgan.

Still we have no criminal charges filed against Tom Marano’s team and they keep beating motions to add them individually as defendants in civil litigation. I remember feeling a little shocked when I first called Mike Nierenberg’s pr people at BofA to tell them about all the dirty emails and whistleblower testimony I had showing how Mike and Jeff executed this fraud and Mike came back saying ‘I’m not worried about it’. Yep that’s the mindset of Wall Street’s top mortgage executives — it just a cost of doing business and the bank will have to pay for their sins.

JP Morgan was Bear Stearns clearing agent before they bought the bank in March 2008. That means they saw all the toxic rmbs Bear was selling – so I don’t buy the argument that it’s not fair for JP Morgan to pay for Bear’s bad boys. Remember JP Morgan had the chance to settle with the monolines who’d sued for only a little over one billion dollars when they bought Bear in 2008 but choose to rack up millions in legal cost for the last five years and fight these charges. Even after Bear had previously told the monolines ‘ok you kind of caught us’ so we’ll pay back what we stole at cost. Seriously read the Ambac complaint and you’ll see this spelled out. So Jamie Dimon crying wolf that he’s a victim of the US government forcing him to buy Bear Stearns is line of total BS and any reporter who prints that line is only writing pr statements for the nation’s largest bank. Why is it so hard for my peers in the financial press to admit these guys did something really really wrong?

Dynamic Journalism

VERBITSKY AND BUHL

Me and doc film maker Nick Verbitsky are immortalized into art for our reporting on the Bear Stearns / JP Morgan double dipping scheme and RMBS investor fraud that has led to over $100bn in lawsuits and a NYAG securities fraud suit against JPM. Verbitsky is on biz TV show The Keiser Report today talking about main street’s frustration with the lack of criminal charges against bankers like the Bear Stearns team led by Tom Marano.

Due Dilligence Problems at JP Morgan Securities: Pension Report Snafu

Due diligence appears to be lacking at JP Morgan Securities. I reported today for Growth Capitalist the mega-bank’s clearing business was using valuation reports from a notorious hedgie manager who has been sued for fraud by regulators and outed from his fund. The inaccurate reports then went to pension investors.

JPM Clearing manages the asset valuation reports Hedge Funds have to file for investors who used IRA pension dollars to join a hedge fund. There are all kinds of special tax treatments this type of investor gets so banks like JP Morgan often act as custodians between investors and the hedge fund managers. Except in this case JP Morgan forgot to do a simple google search to learn Long Island hedgie Corey Ribotsky, of NIR Group, hasn’t had the rights to send any info on the value of the investments in his AJW funds since January.

NIR Group was a large investor in the PIPE space and at its height boasted around $800 million of fund assets. But investors had a rude awakening last month when I reported the court appointed liquidator, PwC, was sending out reports showing the funds had lost 97% of their value. So it’s kind of troubling to see Ribotsky out there trying to get JP Morgan to spin a story for him, by having them deliver reports with inaccurate valuations, during the same week the Liquidator is trying to tell these poor investors they are only getting pennies back.

There is a bunch of great details about other tax related errors (possible manipulations to avoid the IRS knowing taxes should be collected) the hedge fund manager did with JPM Clearing; so go read the story at Growth Capitalist while registration is still free.

What Bear Stearns Whistleblowers told the SEC: New Details of RMBS Fraud & Cover Up

Remember all those whistleblowers the monolines found in their RMBS fraud litigation against Bear Stearns and JP Morgan? The ones JPM’s lawyers tried to publicly out their names so they’d be afraid to testify in the monoline’s case. Well the bank’s dirty legal tactic didn’t work and newly released whistleblower testimony from people who worked for third-party due diligence firms, hired by Bear to get the mortgage security insurers to back their bonds, shows a whole another layer of orchestrated deceit. One so bold it borders on mafia like RICO actions.

Filed in Connecticut state court at the end of August by monolines lawyers at Patterson Belknap is a motion to enforce a New York subpoena that calls for RMBS due dilly firm, Clayton Holdings, to turn over the historical loan review reports that were sent to Bear Stearns. The motion is on behalf of Ambac; the RMBS insurer who first brought the explosive fraud suit against Bear Stearns traders for stealing billions from their own clients. You know the one that led to JP Morgan, Bears’ successor, telling investors last quarter they now have at least $120 billion of possible mortgage security putback suits they could be forced to pay out. Well it looks like Abmac wants the public to know more of the dirt they have on Bear/JP Morgan because in exhibits with the motion they filed there’s some nasty whistleblower sworn testimony.

Clayton Holdings along with a firm called Watterson Prime were the main third-party firms Bear hired to do re-underwriting due diligence. According to the monoline suits this extra level of inspection was designed to prevent defective loans getting packed into the security in the first place. In the heyday of the mortgage boom there was so much competition to get the RMBS bonds insured and sold Bear came up with a novel ideal of paying for ‘independent reviews’ that the monolines use to do themselves before they got so busy picking which bonds to insure. It was a process Bear claimed would add a level of integrity. But new sworn testimony by whistleblowers from Clayton and Watterson Prime shows this was just a ‘veneer of control’ instead of a practiced method to fret out defective loans.

What’s worse is when Clayton or Watterson Prime due dilly workers actually found the bad loans and coded them in the system (called CLAS for Clayton) their supervisors would change the coding to reflect the loans were ok. This enabled the Bear Stearns traders working under Tom Marano to hide the fact loans they’d bought, from the banks like Greenpoint or Countrywide, were garbage but still went into the security because allegedly Bear traders didn’t want to spend the time or money to go back to the originators and buy quality loans. If the courts find the whistleblower statements are true, it’s a clear violation of the monoline rmbs insurance contracts along with possible insurance fraud and violations of the Martin Act.

The whistleblowers names are redacted in the filing but they swore they worked for both Clayton and Watterson prime as freelance due diligence consultants on loan file reviews for Bear Stearns mortgage securities. Their job was to take the original loan files EMC had used to pick which loans would go into a security and make sure it fit Bear’s underwriting standards. Their testimony says they’d find a file with borrower documents they thought were fraud, report it to their supervisor (such as Mr. Weeks at Watterson Prime) and the supervisor would say just move it along and overlook the documents.

“Usually the instruction were just go ahead and keep it moving, enter the information, we will take care of that with the seller or we will try and get correcting documents later,” states one whistleblower talking about working at Watterson Prime in court filings. “Once a lot of the documents were missing or it was prevalent that we don’t have these documents, we were told to ignore, ignore and grade them as normal.”

But it’s wasn’t just ignoring missing documents that was encouraged. The loan reviewers also stated they’d find W-2’s in the files that were logged at ‘stated loans’ (this mean the borrower just claims his income without documentation) and the W-2’s would contradict what the borrower had stated. Meaning the loan clearly had fraud in it.

The whistleblower says when they told their boss at Clayton or Watterson Prime this they were told to “pull out those documents”.
“We would put them in a pile and either they shredded them or they disappeared. They were destroyed but it was not by the underwriter,” said the whistleblower as he testified to how the due dilly firms covered up Bears bad loans for them.

Another whistleblower said at Clayton they were berated in front of their team if they didn’t rate the loan files as normal and feared not getting more contract work if they didn’t find creative ways to make the loans look ok. One method was in the case of couples getting a mortgage; they used the income of one and the credit rating of the other to make the quality rating match up as normal. This process was known as ‘finding compensating factors”.

“When loans did have deviations from loan to value ratios Bear had set as a standard we were told to find compensating factors and approve the loan anyway. On many jobs our team leaders gave us a cheat sheet of compensation factors to make it easier for us to find them,” says another whistleblower in sworn testimony.

In over 50 pages of testimony we learn the team leaders at Clayton Holdings and Watterson Prime were getting this direction from people on the mortgage team at Bear Stearns. According to people familiar with the suit the Securities and Exchange Commission has already interviewed some of these whistleblowers. And the whistleblowers named names regarding who at Bear Stearns was directing the third-party due dilly firms to change loan files and rate them better quality than they really were. One Bear Stearns executive that showed up in court filings directing the due dilly team to basically lie in their reports was John Mongoluzza.

I was told the SEC interviews were done before JP Morgan announced in their last quarterly financial statements the SEC had them given them a Wells Notice saying they were considering suing them for mortgage security violations relating to Bear Stearns.

Former New York Attorney General Andrew Cuomo told the media a few years ago he’d given Clayton immunity for helping with his investigation into possible criminal wrong doing by banks like Bear Stearns. But no charges were brought by Cuomo before he became Governor and it’s unclear what NY’s new AG will do with Clayton.

Ambac’s latest motion filed in Connecticut state court says Clayton is still playing favs with Bear/EMC/JP Morgan by eagerly assisting their lawyers and ignoring a compulsory subpoena to produce documents to Ambac. Clayton who claims they don’t have files Ambac is asking for magically found one of the whistleblowers personnel files that Bear’s lawyer ended up using to cross examine the whistleblower.

So here we have Clayton handed a get out of jail card from NY’s AG and they uses it to help the alleged criminal (JPM/Bear) hide evidence to possibly avoid losing a mega-billion fraud suit?

A recent Abmac filing says they reviewed 5,000 loan files valued at around $2 billion and 85% of the loans had deficiencies problems that Bear should have known were there and thus never put the loan in the security in the first place. Last week Reuters legal columnist Alison Frankel found a new lawsuit filed with similar allegations against Bear/JPM by the RMBS trustee for pension fund investor Baupost. The suit claims after they reviewed Bear/EMC loan files they found an alarming 88% breach rate of the loans in the mortgage securities. So now we have monoline insurers AND investors finding similar malfeasance in the methods of creating and selling RMBS by Bear Stearns.

The examples of cover up described in the recently filed whistleblowers testimony runs deep. Now that I’ve confirmed the SEC has interviewed these whistleblowers we have to wonder if JP Morgan is aggressively negotiating for a settlement or if the SEC is waiting to file suit because it doesn’t want to publicly shame JP Morgan with a securities violation charge before the election. Just think if Bear’s insurers or investors had been given the chance to see Clayton or Watterson Prime due dilly reports that weren’t manipulated – would they have ever bought billions of RMBS from Bear and helped traders under Tom Marano’s team earn millions and go on to run mortgage divisions at Goldman Sachs and Bank of America? It’s those questions investors in Bear’s toxic rmbs hope the SEC doesn’t wait forever on the sidelines to answer.

The case was filed August 24th in Milford,CT Superior Court. Ambac Assurance vs. Clayton Holdings. Ambac’s motion against Clayton asks a CT judge to force Clayton to produce reports reflecting the rate at which Bear Stearns overrode Clayton’s finding with respect to due diligence conducted during the securitization process.