shaw capital management: Our Biggest Financial Firms Don’t Scam

1. In mid-2006, Bear Stearns induced investors to purchase, and Ambac as a financial guarantor to insure, securities that were backed by a pool of mortgage loans that in the words of the Bear Stearns deal manager was a SACK OF SHIT.1 Within the walls of its sparkling new office tower, Bear Stearns executives knew this derogatory and distasteful characterization aptly described the transaction. Indeed, Bear Stearns haddeliberately and secretly altered its policies and neglected its controls to increase the volume of mortgage loans available for its securitizations made in patent disregard for the borrowers ability to repay those loans. After the market collapse exposed its scheme to sell defective loans to investors through these transactions, JP Morgan executives assumed control over Bear Stearns and implemented an across-the-board strategy to improperly bar EMC from honoring its contractual promises to disclose and repurchase defective loans through a series of deceptive practices. In what amounts to accounting fraud, JP Morgans bad-faith strategy was designed to avoid and has avoided recognition of the vast off-balance sheet exposure relating to its contractual repurchase obligations thereby enabling JPMorgan Chase & Co. to manipulate its accounting reserves and allowing its senior executives to continue to reap tens of millions of dollars in compensation following the taxpayer-financed acquisition of Bear Stearns.

Oh, maybe they did.

At least that’s what the lawsuit claims.

It’s especially nice when you make crap loans and then short the companies you intentionally lay off the bad paper on, knowing they’ll blow up in advance. And that’s alleged too:

24. Knowing that its fraudulent and breaching conduct was resulting and would continue to result in grave harm to Ambac, Bear Stearns then implemented a trading strategy to profit from Ambacs potential demise by shorting banks with large exposure to Ambac-insured securities. (The shorts were bets the banks shares or holdings would decrease in value as Ambac incurred additional harm.) In late 2007, Bear, Stearns & Co. Senior Managing Director Jeffrey Verschleiser boasted that (a)t the end of October, while presenting to the risk committee on our business I told them that a few financial guarantors were vulnerable to potential write downs in the CDO and MBS market and we should be short a multiple of 10 of the shorts I had put on . . .