MANHATTAN (CN) - President Barack Obama's recently assembled mortgage fraud task force targeted JPMorgan with its first lawsuit, saying the bank's predecessor cost investors $22.5 billion while plunging the U.S. economy into crisis. Click here to read Courthouse News' Securities Law Review.
New York State Attorney General Eric Schneiderman, who co-chairs the task force, filed the lawsuit in Manhattan Supreme Court Monday, days before the presidential debates.
Schneiderman touted "one set of rules for all" to drown out popular outrage against "too big to fail" banks. Recent history suggests, however, that the prosecutor's billion-dollar suits do not always reap high returns.
In February, Schneiderman partially settled his $2 billion lawsuit
against banks linked to Merscorp, a company blasted for end-running the traditional public recording system, for $25 million.
JPMorgan was one of those big banks, along with four co-defendants.
Schneiderman insisted at the time that the settlement did not clear the company from other claims.
The latest suit centers on JPMorgan's ties to Bear Stearns, the global investment bank whose collapse helped trigger the 2008 financial meltdown.
JPMorgan acquired the company after its shares dove down from $133.20 per share to $10.00 per share, its final purchase price.
Three years later, JPMorgan bought Bear Stearns' subsidiary EMC Mortgage.
The megabank bought their alleged liabilities along with the deals, Schneiderman says.
The 31-page complaint details Bear Stearns' alleged dealings with mortgage originators that appeared on the comptroller of the currency's "Worst Ten" list.
An executive from one of these originators, American Home Mortgage, pleaded guilty to federal mortgage fraud charges.
Despite promises that it screened out bad loans through an "intensive," "prudent," and "robust" due-diligence process, Bear Stearns contracted with firms like Clayton Holdings whose "productivity goals" made the screening process impossible, the complaint states.
Clayton is not named as a defendant.
"During this time frame, Clayton's paramount objective was to get the review job done as quickly as possible for its clients," the complaint states. "Clayton executives established aggressive daily 'productivity' goals. Underwriters who did not maintain the requisite pace of review received warnings from their supervisors and faced the very real prospect of dismissal. As one Team Lead stated in an e-mail: 'Have 1594 loans to do in 5 days. Sound like fun? NOT!'"
Quality control at the bank became so overwhelmed that an unnamed senior executive allegedly warned the "[c]laims situation continues to be a disaster - hitting crisis."
Eventually, the underwriting of toxic loans at Bear Stearns led to "astounding" losses of about $22.5 billion between 2006 and 2007, more than a quarter of its original principal balance of $87 billion, the attorney general says.
"In addition to experiencing extraordinary rates of delinquency, the credit ratings of these securities have been drastically downgraded," the complaint states. "Today, many of the tranches in defendants' [residential mortgage-backed securities] have been downgraded from investment grade to 'junk-bond' status."
The lawsuit charges two counts of securities fraud and persistent fraud.
It seeks injunctive relief, a full accounting, disgorgement, restitution and damages.
Schneiderman called this legal strategy a "workable template for future actions against issuers of residential mortgage-backed securities that defrauded investors and cost millions of Americans their homes," in a statement Tuesday.