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Taibbi: Ex-JPMorgan Lawyer With Smoking Gun on Mortgage Fraud Stymied by Holder Cover-Up

Tuesday, November 11, 2014 By Yves Smith, Naked Capitalism | Report
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(Photo: North Charleston)U.S. Attorney General Eric Holder (Photo: North Charleston)

Matt Taibbi has pulled the curtain back on an offensive and obvious bit of Obama administration bank cronyism that disappeared too quickly from public attention. Earlier this year, JP Morgan settlement negotiations over mortgage misconduct had broken down over price. When word got out that the Department of Justice had a criminal suit that it was ready to file, Jamie Dimon called the DoJ and went to Washington to negotiate a deal. Let us turn the mike over to Georgetown law professor Adam Levitin who wrote at the time:

I’m floored that Attorney General Eric Holder was willing to take a private meeting with JPMorgan Chase CEO Jaimie Dimon while the bank is under criminal investigation and negotiating an enormous civil (and possibly criminal) settlement. I can’t recall something like this meeting happening before. There’s not anything illegal about such a meeting, but the optics are really bad and underscore the privileged position of the too-big-to-fail banks…

Who else is able to call up the AG and just get a meeting like that when their firm is under criminal investigation? Do other citizens get talk things through mano-a-mano with the AG himself? That Dimon even thought to initiate direct contact with Holder suggests that he has no sense of his place in society–or perhaps that he in fact does. Bottom line is that Dimon (and JPM) shouldn’t get any more special treatment than any other citizen, but it sure looks like he did.

But the whole point was to get special treatment. The criminal case went on hold. The settlement was structured to avoid court approval. Taibbi does not mention that the Administration acted as if it had really gotten a great deal by getting what looked like a really big dollar amount, but that was achieved via sleight of hand. The total was goosed up via throwing in a boatload of other claims, the biggest of which was Fannie/Freddie putback claims that constituted $4 billion of the $9 billion in total cash value of the deal. Holder took credit for that, when in fact that suit was launched by the much-pilloried Ed DeMarco of the FHFA (Taibbi correctly points out that the $4 billion of “consumer relief” that brought the headline total to $13 billion was show for the rubes). And JP Morgan admitted to pretty much nothing.

We now learn from Taibbi’s story that a whistleblower, Alayne Fleischmann, a securities lawyer who’d been hired by JP Morgan to help supervise the review of mortgages that were sold into securitizations. Shortly after she joined, the bank brought in a new manager for “diligence” who was technically senior to her. He focused on getting product out the door, no matter how toxic it was, browbeat managers who rejected clearly misrepresented loans, and implemented a “no email” policy to cover up what he was up to.

The centerpiece of the story is a package of particularly noxious mortgages from an originator called Greepoint. Their age alone made them suspect: they were unsecuritized after seven plus months, which meant they’d either already defaulted or had been rejected by another securitizer. One sample had 40% had overstated incomes, and 33% had incomes that were simply not plausible given the supposed employment of the borrower.

Fleischmann jumped ranks and spoke to a JP Morgan managing director, Greg Boester, and told him that selling these loans into securities would amount to fraud. Fleischmann was ignored. Boester is now at JP Morgan, after doing a brief stint at Citadel.

And here is the smoking gun:

A few weeks later, in early 2007, she sent a long letter to another managing director, William Buell. In the letter, she warned Buell of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase’s diligence process.

Fleischmann assumed this letter, which Chase lawyers would later jokingly nickname “The Howler” after the screaming missive from the Harry Potter books, would be enough to force the bank to stop selling the bad loans. “It used to be if you wrote a memo, they had to stop, because now there’s proof that they knew what they were doing,” she says. “But when the Justice Department doesn’t do anything, that stops being a deterrent. I just didn’t know that at the time.”

As we learn, Fleischmann told her story to the SEC, which instead refused to hear anything about Greenpoint. The US Attorney’s office in the Eastern District of California, by contrast, built a case using her evidence, which eventually led to the successful Dimon end-run. Worse, the DoJ almost certainly released Fleischmann’s name to JP Morgan; within days of the Dimon phone call, the Wall Street Journal ran a story stating that the government had a major female witness. And the Morgan bank looks to have successfully blackballed her, as job possibilities suddenly vaporized.

Tabbi also details how JP Morgan lied to keep Fleischmann’s evidence out of private suits:

In October 2013, one of those investors – the Fort Worth Employees’ Retirement Fund – asked a federal judge to force Chase to grant access to a series of current and former employees, including Fleischmann, whose status as a key cooperator in the federal investigation had made headlines….

In response, Dorothy Spenner, an attorney representing Chase, told the court that Fleischmann was not a “relevant custodian.” In other words, she couldn’t testify to anything of importance. Federal Magistrate Judge James C. Francis IV took Chase’s lawyers at their word and rejected the Fort Worth retirees’ request for access to Fleischmann and her evidence.

Other investors bilked by Chase also tried to speak to Fleischmann. The Federal Home Loan Bank of Pittsburgh, which had sued Chase, asked the court to force Chase to turn over a copy of the draft civil complaint that was withheld after Holder’s scuttled press conference. The Pittsburgh litigants also specified that they wanted access to the name of the state’s cooperating witness: namely, Fleischmann.

In that case, the judge actually ordered Chase to turn over both the complaint and Fleischmann’s name. Chase stalled. Later in the fall, the judge ordered the bank to produce the information again; it stalled some more.

Then, in January 2014, Chase suddenly settled with the Pittsburgh bank out of court for an undisclosed amount. Months after being ordered to allow Fleischmann to talk, they once again paid a stiff price to keep her testimony out of the public eye.

This story alone show that the claim that Obama and Holder made, that there was bad conduct in the mortgage market, but it didn’t rise to the level of criminal activity, is almost certainly a lie. Pretty much anyone familiar with the subprime market knew that, but now we have evidence that the government had concrete, powerful evidence plus a credible witness and chose to let a powerful bank off. The fact that the bank continued to engage in fraud after getting two warnings to senior managers, one in writing, would seem to rise to the level of criminality.

And as reader MBS Guy points out, how can the Administration reconcile this “let’s enable a coverup, just make sure we get some decent optics” with its posture on Libor and foreign exchange abuses? Are we really supposed to believe that the bar the DoJ is using in those to establish intent is more stringent than having a written, detailed warning to executives that was ignored>

JP Morgan is the bank with far and away the worst rap sheet of any US financial firm. It’s a recidivist in mortgages and in other areas of the bank. In dealing with money-laundering at foreign banks, officials forced key executives out, including one of the very top officials at BNP Paribas. But that was at New York State superintendent of financial services Benjamin Lawsky’s insistence. You’ll see nothing so bloody minded out of the DoJ when left to its own devices.

But this story highlights another element familiar to NC regulars: how Dimon lies routinely to his shareholders and in official testimony. Dimon has repeatedly maintained that JP Morgan was smarter and cleaner in mortgages than its peers. In fact, the Morgan bank did indeed have less market share, but that was by virtue of being a late entrant and then only intermittently willing to pay market prices to hire seasoned staff. Taibbi’s account shows that its claims to virtue don’t stand up to scrutiny.

Keep in mind that the JP Morgan criminal case was never officially closed; Taibbi surmises, as we did at the time, that the Administration agreed informally not to take the prosecution any further. Given that Holder is already doing victory laps, it’s a safe bet that the well-warranted consternation that this article will stir up will not bring that lawsuit back to life.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.

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Taibbi: Ex-JPMorgan Lawyer With Smoking Gun on Mortgage Fraud Stymied by Holder Cover-Up

Tuesday, November 11, 2014 By Yves Smith, Naked Capitalism | Report
  • font size decrease font size decrease font size increase font size increase font size
  • Print

(Photo: North Charleston)U.S. Attorney General Eric Holder (Photo: North Charleston)

Matt Taibbi has pulled the curtain back on an offensive and obvious bit of Obama administration bank cronyism that disappeared too quickly from public attention. Earlier this year, JP Morgan settlement negotiations over mortgage misconduct had broken down over price. When word got out that the Department of Justice had a criminal suit that it was ready to file, Jamie Dimon called the DoJ and went to Washington to negotiate a deal. Let us turn the mike over to Georgetown law professor Adam Levitin who wrote at the time:

I’m floored that Attorney General Eric Holder was willing to take a private meeting with JPMorgan Chase CEO Jaimie Dimon while the bank is under criminal investigation and negotiating an enormous civil (and possibly criminal) settlement. I can’t recall something like this meeting happening before. There’s not anything illegal about such a meeting, but the optics are really bad and underscore the privileged position of the too-big-to-fail banks…

Who else is able to call up the AG and just get a meeting like that when their firm is under criminal investigation? Do other citizens get talk things through mano-a-mano with the AG himself? That Dimon even thought to initiate direct contact with Holder suggests that he has no sense of his place in society–or perhaps that he in fact does. Bottom line is that Dimon (and JPM) shouldn’t get any more special treatment than any other citizen, but it sure looks like he did.

But the whole point was to get special treatment. The criminal case went on hold. The settlement was structured to avoid court approval. Taibbi does not mention that the Administration acted as if it had really gotten a great deal by getting what looked like a really big dollar amount, but that was achieved via sleight of hand. The total was goosed up via throwing in a boatload of other claims, the biggest of which was Fannie/Freddie putback claims that constituted $4 billion of the $9 billion in total cash value of the deal. Holder took credit for that, when in fact that suit was launched by the much-pilloried Ed DeMarco of the FHFA (Taibbi correctly points out that the $4 billion of “consumer relief” that brought the headline total to $13 billion was show for the rubes). And JP Morgan admitted to pretty much nothing.

We now learn from Taibbi’s story that a whistleblower, Alayne Fleischmann, a securities lawyer who’d been hired by JP Morgan to help supervise the review of mortgages that were sold into securitizations. Shortly after she joined, the bank brought in a new manager for “diligence” who was technically senior to her. He focused on getting product out the door, no matter how toxic it was, browbeat managers who rejected clearly misrepresented loans, and implemented a “no email” policy to cover up what he was up to.

The centerpiece of the story is a package of particularly noxious mortgages from an originator called Greepoint. Their age alone made them suspect: they were unsecuritized after seven plus months, which meant they’d either already defaulted or had been rejected by another securitizer. One sample had 40% had overstated incomes, and 33% had incomes that were simply not plausible given the supposed employment of the borrower.

Fleischmann jumped ranks and spoke to a JP Morgan managing director, Greg Boester, and told him that selling these loans into securities would amount to fraud. Fleischmann was ignored. Boester is now at JP Morgan, after doing a brief stint at Citadel.

And here is the smoking gun:

A few weeks later, in early 2007, she sent a long letter to another managing director, William Buell. In the letter, she warned Buell of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase’s diligence process.

Fleischmann assumed this letter, which Chase lawyers would later jokingly nickname “The Howler” after the screaming missive from the Harry Potter books, would be enough to force the bank to stop selling the bad loans. “It used to be if you wrote a memo, they had to stop, because now there’s proof that they knew what they were doing,” she says. “But when the Justice Department doesn’t do anything, that stops being a deterrent. I just didn’t know that at the time.”

As we learn, Fleischmann told her story to the SEC, which instead refused to hear anything about Greenpoint. The US Attorney’s office in the Eastern District of California, by contrast, built a case using her evidence, which eventually led to the successful Dimon end-run. Worse, the DoJ almost certainly released Fleischmann’s name to JP Morgan; within days of the Dimon phone call, the Wall Street Journal ran a story stating that the government had a major female witness. And the Morgan bank looks to have successfully blackballed her, as job possibilities suddenly vaporized.

Tabbi also details how JP Morgan lied to keep Fleischmann’s evidence out of private suits:

In October 2013, one of those investors – the Fort Worth Employees’ Retirement Fund – asked a federal judge to force Chase to grant access to a series of current and former employees, including Fleischmann, whose status as a key cooperator in the federal investigation had made headlines….

In response, Dorothy Spenner, an attorney representing Chase, told the court that Fleischmann was not a “relevant custodian.” In other words, she couldn’t testify to anything of importance. Federal Magistrate Judge James C. Francis IV took Chase’s lawyers at their word and rejected the Fort Worth retirees’ request for access to Fleischmann and her evidence.

Other investors bilked by Chase also tried to speak to Fleischmann. The Federal Home Loan Bank of Pittsburgh, which had sued Chase, asked the court to force Chase to turn over a copy of the draft civil complaint that was withheld after Holder’s scuttled press conference. The Pittsburgh litigants also specified that they wanted access to the name of the state’s cooperating witness: namely, Fleischmann.

In that case, the judge actually ordered Chase to turn over both the complaint and Fleischmann’s name. Chase stalled. Later in the fall, the judge ordered the bank to produce the information again; it stalled some more.

Then, in January 2014, Chase suddenly settled with the Pittsburgh bank out of court for an undisclosed amount. Months after being ordered to allow Fleischmann to talk, they once again paid a stiff price to keep her testimony out of the public eye.

This story alone show that the claim that Obama and Holder made, that there was bad conduct in the mortgage market, but it didn’t rise to the level of criminal activity, is almost certainly a lie. Pretty much anyone familiar with the subprime market knew that, but now we have evidence that the government had concrete, powerful evidence plus a credible witness and chose to let a powerful bank off. The fact that the bank continued to engage in fraud after getting two warnings to senior managers, one in writing, would seem to rise to the level of criminality.

And as reader MBS Guy points out, how can the Administration reconcile this “let’s enable a coverup, just make sure we get some decent optics” with its posture on Libor and foreign exchange abuses? Are we really supposed to believe that the bar the DoJ is using in those to establish intent is more stringent than having a written, detailed warning to executives that was ignored>

JP Morgan is the bank with far and away the worst rap sheet of any US financial firm. It’s a recidivist in mortgages and in other areas of the bank. In dealing with money-laundering at foreign banks, officials forced key executives out, including one of the very top officials at BNP Paribas. But that was at New York State superintendent of financial services Benjamin Lawsky’s insistence. You’ll see nothing so bloody minded out of the DoJ when left to its own devices.

But this story highlights another element familiar to NC regulars: how Dimon lies routinely to his shareholders and in official testimony. Dimon has repeatedly maintained that JP Morgan was smarter and cleaner in mortgages than its peers. In fact, the Morgan bank did indeed have less market share, but that was by virtue of being a late entrant and then only intermittently willing to pay market prices to hire seasoned staff. Taibbi’s account shows that its claims to virtue don’t stand up to scrutiny.

Keep in mind that the JP Morgan criminal case was never officially closed; Taibbi surmises, as we did at the time, that the Administration agreed informally not to take the prosecution any further. Given that Holder is already doing victory laps, it’s a safe bet that the well-warranted consternation that this article will stir up will not bring that lawsuit back to life.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.