Last week, New York Attorney General Eric Schneiderman, who is the co-chairman of the Residential Mortgage-Backed Securities Working Group – which President Obama formed earlier this year to investigate who was responsible for the misconduct that led to the financial crisis – filed a complaint against JPMorgan Chase. The complaint, which seeks an unspecified amount in damages (but says that investors lost $22.5 billion), alleges widespread wrongdoing at Bear Stearns in the run-up to the financial crisis. JPMorgan Chase, of course, acquired Bear in 2008. Apparently, this is just the beginning of a Schneiderman onslaught. “We do expect this to be a matter of very significant liability, and there are others to come that will also reflect the same quantum of damages,” Schneiderman said in an interview with Bloomberg Television. “We’re looking at tens of billions of dollars, not just by one institution, but by quite a few.”
The prevailing opinion seems to be, Yay! Someone is finally making, or at least trying to make, the banks pay for their sins. But while there is one big positive to the complaint, overall I don’t think there’s any reason to cheer.
Schneiderman’s case clearly lays out the alleged bad behavior at the old Bear Stearns. Although Bear promised investors it was doing due diligence on the mortgages it purchased, it wasn’t. Defendants “systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans,” alleges the complaint. Even worse, Bear would make deals with the sellers of mortgages in which it would force them to make a payment for failed mortgages, but instead of taking the bad loan out of the trust, Bear would just keep the money – even though both Bear’s lawyers and its accountants (this is truly stunning), according to Schneiderman’s case, warned them that wasn’t OK.
The complaint shows just how complicit the Bear bankers were in the proliferation of bad loans that almost took down the economy, and that alone makes it valuable. “He’s finally telling the story so that people can understand the depth and magnitude of what went on,” says Eliot Spitzer, who had Schneiderman’s job after the dot-com bust.
But beyond that, there’s not much to applaud. The biggest flaw is that Schneiderman decided not to name any individuals, a practice that is sadly all too common in financial fraud cases. The New York Times argued that it’s a strength that the case doesn’t focus on individuals and specifics, and instead alleges a broad pattern of fraud. But naming names is powerful. Anonymity is weak, and that is amplified when the generalized wrongdoing allegedly occurred at a now-defunct bank. In addition, the lack of names is weird. How could the actions alleged in the complaint have been accomplished if real people didn’t do them?