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SEC Settles with JP Morgan/Bear Stearns: Crime Pays . . . . . . . . . . (“Why I Left Bear Stearns”) . . . . . . . . . . .

Posted by Larry Doyle on November 16, 2012 8:29 PM |

This evening I feel the need to take a shower after having just read the most despicable settlement yet rendered by the SEC. In fact, having just read this settlement, I am embarrassed to be a citizen of a nation with such little moral fiber as to let what is a blatant criminal act go properly unpunished. This is a sad day in America. I do not write that for simple effect.

I write that because I believe a settlement this afternoon between the SEC and JP Morgan/Bear Stearns closes the door on perhaps the single most egregious criminal act I have yet come across while writing this blog.

I sat within spitting distance of the individuals involved in this travesty while I worked at Bear Stearns in the early to mid ’90s.

Their behaviors and that of the execs charged with supervising them confirm why I left what many considered to be a glorified bucket shop at Bear Stearns at the end of 1996. In point of fact, Bear Stearns did have many great people. Those running the enterprise when I left were not among them. Why so? At Bear Stearns, management was always willing to look the other way as profit came before principle. As this case shows, that profit – – – especially if it were of significant size – – – would overrule principle even it were derived from outright theft.

I am guessing the crowd at the SEC might be embarrassed by this settlement as well given that they released this news late on a Friday afternoon. How truly gutless. Let this be Mary Schapiro’s lasting legacy.

I most recently highlighted the criminal behavior embedded in this settlement earlier this week in writing How Bear Stearns Really Screwed Investors. The SEC placed a dollar value on this behavior of $222 million . . . yet no individual faces the music. Let’s navigate and review the release, SEC Charges JP Morgan Securities With Misleading Investors in RMBS Offerings,

JP Morgan also is charged for Bear Stearns’ failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least $137.8 million.

The SEC’s complaint also alleges that Bear Stearns’ bulk settlements covered loans collateralizing 156 different RMBS transactions issued from 2005 to 2007. Loan originators were usually required by contract to buy back loans that suffered early payment defaults or had other defects. However, Bear Stearns frequently negotiated discounted cash settlements with these loan originators in lieu of a buy-back on loans that were owned by the RMBS trusts.

The firm – both before and after the merger with JP Morgan – then kept most of the bulk settlement proceeds. The firm failed to disclose the practice to investors who owned the loans. Bear Stearns repurchased only about 13 percent of these defective bulk settlement loans from the trusts, compared to a nearly 100 percent repurchase rate when loan originators agreed to buy back the defective loans. For most loans covered by bulk settlements, the firm collected money from originators without paying anything to the trusts.

In my humble opinion, this case could easily have been tried as a racketeering charge. Why wasn’t it? As I wrote the other day, if this theft were occurring at Bear I would not doubt that it was going on at a host of other shops as well. If the Bear guys were going to face the music, you can rest assured that they were not going down alone. Will there ever be justice?

Well, as believers know all too well, the day of reckoning has not been lost forever but merely put off until another time. I believe the judgment on that day may actually be far more severe and long lasting.

Navigate accordingly.

I thank the regular reader who brought this SEC release to my attention.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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