Who knows how New York Attorney General Eric Schneiderman will fare in the civil suit he filed Monday against a unit of the JPMorgan Chase investment bank, accusing it of systematic mortgage fraud during the housing boom. But the legal action, the first taken by government since President Obama created a task force to investigate evidence of massive fraud by mortgage bankers, is welcome even this many years after the fact.
Indeed, the company cited in Schneiderman’s suit is Bear Stearns, which JPMorgan didn’t even own when the alleged improprieties took place, between 2005 and 2007. The federal government persuaded JPMorgan to buy Bear Stearns (at a near-giveaway price) in 2008, to keep the U.S. banking industry from collapsing after thousands of nonperforming mortgages — bought, repackaged and sold by investment banks including Bear Stearns — left smaller banks, insurers and other investors in the lurch to the tune of hundreds of billions of dollars.
Schneiderman’s suit alleges that Bear Stearns knew all along its loan packages were garbage but misled buyers into thinking they were sound. And when it got caught, and sought to sell the defective mortgages back to their originators (as required), it kept the proceeds instead of refunding them to defrauded customers.
JPMorgan’s response to the suit wasn’t terribly convincing. Rather than the usual “everyone was doing it” defense, it merely sought to undermine Schneiderman’s case by accusing him of “recycling claims already made by private plaintiffs.” Well, so what if he did? Investors lost an estimated $22.5 billion on more than 100 subprime securities issued by Bear Stearns before the bottom fell out, and many of them have yet to see any reimbursement for their losses. Fraud is fraud, whether it’s filed by an individual, private plaintiff or a public one on behalf of hundreds of others.
JPMorgan, which settled a lot of those private suits privately, says it will fight this one. That’s good because it should help Schneiderman and others in the president’s multi-agency task force get to the bottom of the crisis Bear Stearns and others in the industry created, a crisis that came uncomfortably close to toppling the world economy.
And while it’s essentially too late for Schneiderman to file criminal charges in New York, the feds have more leeway with the statute of limitations. Paying off multibillion-dollar claims will hurt these banks and have some impact on executives’ behavior, but not nearly as much as if a few of them get indicted or maybe even put behind bars for a time.