In a pleading filled with allegations that can only be described as shocking, Ambac has accused Bear Stearns and its former subsidiary EMC Mortgage (both now owned by JP Morgan) of a parade of horribles in its proposed amended complaint in its case over defective residential mortgages in the Southern District of New York. If only a fraction of these allegations are true–and the documentary evidence cited in support suggests that they are–it constitutes the most damning evidence thus far that securitizing banks engaged in out-and-out fraud in the race to churn out more RMBS and enhance their bottom lines.
Among the allegations are that Bear Stearns (now JP Morgan Securities) profited by obtaining settlements from certain lenders that sold the bank defective loans, while at the same time denying repurchase requests from investors and insurers based on the same loans and the same deficiencies (thereby “double-dipping” on these loans); that Bear Stearns was simultaneously selling short shares of banks holding Ambac-insured securities as it denied the bond insurer the benefit of its contractual right to have Bear repurchase defective loans; that Bear covertly cut the time allowed for early payment defaults without telling investors, allowing it to securitize more loans that had already gone bad; and that Bear ignored its own due diligence findings on loan deficiencies, lied to rating agencies about this data, and then went ahead and securitized these loans, anyway.
I first reported on this lawsuit back in November of 2008, and noted that while Ambac had accused EMC of originating mortgages it knew could not be repaid, it stopped short of alleging fraudulent or negligent misrepresentation on the part of the originator of loans or arranger of the securitizations it had agreed to insure. Apparently, Ambac was simply waiting for better evidence of such misrepresentation to emerge during the discovery process. It now looks like the strategy paid off in spades.
I can’t possibly do justice to this slew of new allegations against Bear, culled mostly from emails and testimony obtained by the bond insurer in discovery, so I will just recommend that you read the Proposed Amended Complaint (long but well worth it) or some of the excellent news articles that came out today. I am quoted in this article by Jody Shenn at Bloomberg News about Ambac amending its complaint to allege that Bear Stearns was talking out of both sides of its mouth on the same deficient loans. This is another great story from The Atlantic, which has been following the news of whistleblowers within EMC since May of 2010, discussing some of the colorful emails obtained from Bear Stearns execs, including one from Bear deal manager Nicolas Smith on August 11th, 2006 to Keith Lind, a Managing Director on the trading desk, referring to a particular bond, SACO 2006-8, as “SACK OF SHIT [2006-]8” and saying, “I hope your [sic] making a lot of money off this trade.”
Much more to come on this fascinating new development. I shouldn’t be surprised anymore by the audacity and utter lack of principles shown by Wall Street execs over the last five years, but somehow, I still am.