Jpmorgan sued for Bear Stearns loans

JPMORGAN Chase, the biggest US bank, has been sued by New York attorney-general Eric Schneiderman, who alleges that the Bear Stearns business the bank took over in 2008 defrauded mortgage-bond investors.

Investors were deceived about the defective loans backing securities they bought, leading to “monumental losses”, Mr Schneiderman said in a complaint filed on Monday in New York State Supreme Court.

“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.”

Mr Schneiderman in January was named co-chairman of a statefederal group formed to investigate misconduct in bundling of mortgage loans into securities leading up to the financial crisis. The group includes officials from the US justice department, the Securities and Exchange Commission, the FBI and other federal and state officials.

Joe Evangelisti, a JPMorgan spokesman, said the bank would contest the complaint, which is “entirely about” conduct by Bear Stearns. JPMorgan acquired Bear Stearns in March 2008 after a run on what was then Wall Street’s fifth-largest securities firm.

“We’re disappointed that the New York attorney-general decided to pursue the civil action without offering us an opportunity to rebut the claims and without developing a full record — instead relying on recycled claims already made by private plaintiffs,” Mr Evangelisti said yesterday.

JPMorgan bought Bear Stearns after the investment bank ran out of cash. The transaction was urged by former Treasury secretary Henry Paulson, his successor Timothy Geithner, who was head of the Federal Reserve Bank of New York at the time, and Fed chairman Ben Bernanke.

JPMorgan CEO Jamie Dimon

Investors were deceived about the defective loans backing securities they bought, leading to monumental losses

told the trio that he would only do such an emergency deal if the government was willing to take the risk on the most toxic Bear Stearns assets. The Fed agreed to take over $30bn of mortgagerelated securities to placate him.

Mr Paulson also directed Mr Dimon to keep his price offer low to make it clear to the public that shareholders of the defunct firm were being punished for the management errors. That produced a $2.52-per-share offer, which Bear Stearns management had no choice but to accept.

Mr Dimon had to raise his offer to $10 a few weeks later because of a legal loophole in documents rushed out initially that gave Bear Stearns shareholders an opportunity to hold out on approving the sale, while JPMorgan was left on the hook for potential losses of the smaller rival.

“JPMorgan Chase stands behind Bear Stearns,” Mr Dimon said at the time. “Bear Stearns’s clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’s counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”

Mr Schneiderman said JPMorgan failed to abide by claims it was ensuring the quality of loans backing the securities and “routinely overlooked defective loans” identified during due diligence reviews. The misconduct in due diligence and quality control “constituted systemic fraud on thousands of investors”, he said.

According to the complaint, the cumulative realised losses on more than 100 subprime and AltA securitisations that the defendants sponsored and underwrote in 2006 and 2007 total about $22.5bn, or about 26% of the original balance of about $87bn. Bloomberg