Wall Street’s latest chapter in corporate accountability is hardly satisfying, even if it is a rare admission of wrongdoing from a major bank. On Tuesday, the Justice Department announced a $13 billion settlement with J.P. Morgan for its rapacious role in the housing market bubble and collapse.
Beyond analyses showing that the government’s supposed largest fine ever might end up “closer to $2.74 billion,” and that $7 billion of it is tax deductible—tantamount to America’s 138 million taxpayers each giving a $50 bill to Morgan—the nation’s business press is filled with praise for the bank turning a page.
No one should hold their breath waiting for the Justice Department to announce criminal charges against bank executives; even if Attorney General Eric Holder says the case it not closed. Instead, what Americans are left with is an odd legal creature—a so-called “Statement of Facts”—describing Morgan’s greedy sins.
This declaration is not written in plain English. So here’s AlterNet’s translation of what Morgan said that it did, followed by the relevant legalese. This is as close to a corporate confession of greed and deceit as Americans get today.
1. J.P. Morgan knew it had bad loans from the start.
J.P. Morgan made billions by buying high-interest mortgages and selling them as packages to investors, who expected solid returns. Inside Morgan, its contactors knew that they were buying loans that didn’t even meet the brokers’ standards.
“JPMorgan employees were informed by due diligence vendors that a number of the loans included in at least some of the loan pools that it purchased and subsequently securitized did not comply with the originators’ underwriting guidelines.”
2. J.P. Morgan knew appraisers were inflating values.
To get a mortgage, lenders require an appraisal as part of a clearance process. Morgan knew appraisers were rubber-stamping home values that were absurdly high, but ignored it. The bigger the loan, the more profit in interest payments.
“A number of the properties securing the loans had appraised values that were higher than the values derived in due diligence testing from automated valuation models, broker price opinions or other valuation due diligence methods.”
3. J.P. Morgan lied about these values to investors.
Their business was based on reselling bundles of loans, so they deliberately over-promised to investors and hid information that the loans would likely fail.
“JPMorgan represented to investors in various offering documents that loans in the securitized pools were originated “generally” in conformity with the loan originator’s underwriting guidelines.”
4. When asked about bad loans, they said, ‘Don’t worry.”
When asked about bad loans in their budled investments, the bank said they were looking at mortages one-by-one and carefully certified their loans.
“Exceptions were made based on “compensating factors,” determined after “careful consideration” on a “case-by-case basis.”
5. They were buying loans like sharks biting at bait.
J.P. Morgan went right to the worst mortgage mills and starting buying everything that they had written, which included very-high interest loans on home values that were overstated with unsupportable payments.
JPMorgan began the process of creating RMBS [residential mortgage backed securities] by purchasing pools of loans from lending institutions, such as Countrywide Home Loans, Inc., or WMC [Washington Mutual] Mortgage Corporation, that originated residential mortgages by making mortgage loans to individual borrowers.”[WMC collapsed and was taken over by the federal government in 2008].
6. Their sales pitches were filled false assurances.
J.P. Morgan’s sales team, which included newly minted M.B.A. business school graduates working the phones and higher-ups at industry conferences armed with Powerpoint presentations, boasted of quality controls and vetting.
“JPMorgan salespeople marketed its due diligence process to investors through oral communications that were often scripted by internal sales memoranda, through presentations given at industry conferences, and to certain individual investors. In marketing materials, JPMorgan represented that the originators had a “solid underwriting platform,” and that JPMorgan was familiar with and approved the originators’ underwriting guidelines.”
7. Meanwhile, Morgan knew it was buying bad loans.
Back at corporate headquarters, the auditors that Morgan hired to review the mortgages that they were buying found that a sizeable slice of them—from the originators like Countrywide—did not even meet the mortgage broker’s supposed standards, and lacked information showing borrowers could pay them back.
“JPMorgan’s due diligence vendors graded numerous loans in the samples as Event 3’s, meaning that, in the vendors’ judgment, they neither complied with the originators’underwriting guidelines nor had sufficient compensating factors, including in many instances because of missing documentation such as appraisals, or proof of income, employment or assets.”
8. They dumped bad loans, en masse, into loan pools.
Executives ignored their auditors and threw the bad loans into the larger pot, as if that would make them go away, as if their solution was diluting its impact. When that didn’t work on an individual loan basis, they signed off on bad loans in bulk.
“JPMorgan directed that a number of the uncured Event 3 loans be “waived” into the pools facilitating the purchase of loan pools, which then went into JPMorgan inventory for securitization. In addition to waiving in some of the Event 3 loans on a case-by-case basis, some JPMorgan due diligence managers also ordered “bulk” waivers.”
9. They had twice the bad loans as their standards allowed.
The bank’s internal standards allowed for up to 15 percent of their bundled loans to be risky. But Morgan’s auditors found that they had nearly double that figure. So they cooked their books, by re-grading those bad loans, from so-called “Event 3” to “Event 2” status, to make its portfolio look like it met the bank’s standards.
“From the first quarter of 2006 through the second quarter of 2007, of the 23,668 loans the vendor reviewed for JPMorgan, 6,238 of them, or 27 percent, were initially graded Event 3 loans and, according to the report, JPMorgan ultimately accepted or waived 3,238 of these Event 3 loans – 50 percent – to Event 2.”
10. They met with Countywide, but kept buying bad loans.
Morgan auditors obviously knew that they had a very big problem on their hands and met with the slippery loan originators. But that did not stop other executives from buying bundles of bad loans—such as ones where borrowers made up their income on loan applications. Instead of approving individual mortgages, Morgan picked up its pace and approved these loan purchases in bulk.
“JPMorgan Managing Directors in due diligence, trading, and sales met with representatives of the originator to discuss the loans, then agreed to purchase two loan pools without reviewing those loan pools in their entirety as JPMorgan due diligence employees and managers had previously decided; waived a number of the stated income loans into the pools; purchased the pools; and subsequently securitized hundreds of millions of dollars of loans from those pools into one security.”
11. They kept telling investors everything was peachy.
Even though this skullduggery, mismanagement and distortions was going on inside the bank’s offices and known to top Morgan executives, they said nothing and kept selling the bundles with bad loans to investors.
“None of this was disclosed to investors.”
12. Other Wall Street giants did the exact same thing.
During the financial crisis brought by the collapse of the housing market, Morgan bought Bear Stearns, an investment bank, and Washington Mutual Bank. These banks did the exact same thing as Morgan; knowingly buying mortgages that never should have been written in the first place and ignoring auditors.
“Bear Stearns would purchase loans where there was a variance from the guidelines that the managers or other employees deemed acceptable. In addition, Bear Stearns completed bulk purchases of Alt-A loan pools even though the rate of loans with exceptions in the due diligence samples indicated that the un-sampled portion of a pool likely contained additional loans with exceptions.”
And so did Washington Mutual, which failed was closed by the government’s Office of Thrift Supervision in 2008.
“WaMu did not disclose to securitization investors in written offering materials the information from its internal reviews concerning instances of borrower fraud and misrepresentations regarding borrower credit, compliance, and property valuation, in the origination of loans, including as to loans that were sold into securitizations.”
These terse, matter-of-fact sentences from Department of Justice lawyers are what a corporate confession of massive greed and wrongdoing looks like today. It’s not very satisfying or reassuring to know that banks like Morgan preyed on the public—with predatory loans, cooked books, false sales pitches and no real effort to rein in abuses—because they were making money hand over fist.
While they partied on, the collapse of the housing market eviscerated the life savings of millions of people, as home values fell and still have not recovered. Meanwhile, the fact that apparently $7 billion of the settlement will be deductible from Morgan’s taxes is maddening. That’s equal to every American taxpayer handing Morgan CEO James Dimon a $50 bill—as if he’s not rich enough.
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