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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.

  • Jack

    The MONEY CHANGERS!!

    • Don

      +1

  • Dan

    Jimmy Cayne probably gave them a pat on the back and a bag of his finest weed.

  • Rob Phillips

    You should have spit on them when you had the chance. ; )

  • #8

    Convict? Don’t be silly….those guys have gone on to senior positions at RBS, Goldman, Citadel, Pimco, JPM, Ally Bank, and the list goes on and on…..

  • fred

    LD,

    I believe there is something else at work here, regulators have a track record of taking down some of the perps but leaving others unscathed. As example, Keating, Milken, Madoff and Raj were taken down whereas perps at Bear Sterns, Countrywide, MF Global and GS were allowed to walk.

    What am I missing, is it a matter of too big to fail, political influence, regulatory ineptitude, systematic risk or maybe smoking gun?

    At least if we knew what crimes or which persons beforehand, we could avoid wasting our time writing,
    caring and demanding justice or change.

    For example if it is a foregone conclusion that Corzine will walk, why bother even writing or commenting, it’s just a waste of time and effort.

    Put another way, we’ve just experienced one of the most systematically dangerous and wealth destructive periods in the history of the world yet it seems we have done nothing but exchange private for public debt, we have done nothing to ensure that it never happens again. Dodd Frank, what a joke, a thousand plus pages of giberish!

    We can do better, we must do better.

    • Randee

      If you can’t see the difference between Madoff and the others you mention, you are too stupid to be worth my time.

      • LD

        Comments and E-Mail Policy:
        I look for active engagement at Sense on Cents. Because I value your thoughtful opinions, I encourage you to add comments to this discussion. The broader the perspectives, the more everybody benefits. In that spirit of invitation, the only rules here are mutual respect and tolerance with no off-color language.

        • Randee

          I absolutely concur. Just had to make an exception for Fred including Madoff with the others, which was over the top dumb.

          • fred

            Randehehe,

            Why don’t you add some value, you’ve responded to my post twice but you haven’t really said anything worth anyones time reading. You obviously have a very high opinion of yourself and your knowledge of the subject matter.

            Big R, once again just for you, I included Madoff in the list because he was prosecuted. Rather than looking for distinction among those prosecuted, I was looking for their commonality, I thought this might shed some light on who, why, and how prosecution is being pursued.

            Is it simply a matter of Washington-Wall Street incest or are there distinctive nuances based upon other common factors that determine prosecutorial ambition?

            Randee, please, in the future, when you choose to participate, dazzle us with your brilliance not your ignorance.

  • Richard

    Theft is Theft….we all pay the price for this given the diminution of our values and the rule of law.

    • fred

      Is it a stock market or a market of stocks?

      My values are intact and I follow the rule of law, so do my friends and family, I assume Richard that you feel similarly as I assume does LD.

      Are we mistaken about ourselves, are we really a stock market rather than a market of stocks? Are our character weaknesses simply waiting for a situation in order to be exploited? ie. Working under the table and collecting unemployment, putting in a false insurance claim related to the hurricane, being untruthful about our income to qualify for a mortgage, cheering when a guilty man goes free because of past injustice.

      Does regulatory failure affect our character through false and misleading rationalizations and justifications that result in the development of a communal sense that it’s ok to commit crime because everyone else is doing it? Does regulatory failure thus allow someone elses wrongs to become our rights?

      Accepting my own logic and coming full circle, I guess we must see to it that Corzine and other high profile perps are criminally prosecuted in order to save ourselves from ourselves. Whether it’s a personal sense of right and wrong, a fear of getting caught or a fear of punishment, we need our conscience to tell us that its not ok to commit crime under any circumstances, we must set an example for the weaker among us and the weakness within us.

      I guess allowing our regulators to fail us cannot be an option that we accept or tolerate. So why do we?

      Dare to care, show you care, always care.

      Thanks Richard, I needed that!

  • Jon

    Wow

  • Ray

    Love ya Larry!

    Way to warn these guys. They may repent one day but I doubt it (yet can pray for it!!). And what a gutless DOJ and attorney generals we have. There is little righteousness in the financial world.

    Again Happy Thanksgiving.

  • GMA

    Larry…once again I fall back on what has become a slogan I find myself referring to all too frequently in recent times: “All that is needed for evil to succeed is for good men to do nothing”. Thank you, for your valiant attempts to “do something”. Sure seems as though you are one of the few who care enough to take on the corruption AND the collusion.

  • Virginia

    Wow Larry – and tell us how you really feel.

    Outstanding piece. Maybe they’ll run into a Judge Rakoff… I feel the same way – frickin’ gutless wonders at the SEC and the Administration. At least if they are too afraid to go after these bad boys – the least they could do is call a moratorium like Spain and take away their toys for a while.

  • Bill

    Just proves the old maxim–Don’t ever steal anything small.






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