SEC Knocking Down the Door at JP Morgan Chase

JPM’s Jamie Dimon likes to brag and bully people with who he knows and talks to. Well now is his big chance. He gets to talk to the SEC who are investigating the truth about the liabilities and repurchase obligations connected with the mortgage mess. Eventually, the SEC is going to figure out that Dimon’s bravado and arrogance stemmed from the fact that he thought he got away with the biggest heist in history. Not so. Don’t do the crime if you can’t do the time.

When all is said and one it will become apparent that the winners and losers are easily accounted for — on one side there are the winners who committed the largest act of fraud in human history — and on the other side there are the losers who lost their money and homes to satisfy the rapacious lust for money and power. The losers were investors, pensioners, homeowners and taxpayers. The losers included people who depend upon various social services — you know little things like police, fire, rescue, education, medical emergencies, medical care for the young and the list goes on and on.

When all is said and one it will be clear that trillions in federal “aid” was taken by Dimon and his fellow future cell mates under false pretenses. The only losses these investment banks ever faced was a loss of excess profits. Lehman and Bear Stearns may have been different because they were even more clueless than the rest about the toxicity of the crap they were dealing out. But then they didn’t get any of that Federal money did they? (Not that they should have).

The SEC Just Demanded More Information On JPMorgan Repurchase Liabilities

(This guest post was published at

The Securities and Exchange Commission (SEC) recently took a much needed step towards improving the transparency of bank balance sheets, particularly when it comes to the adequacy of reserves for mortgage repurchase obligations stemming from banks’ violations of representations and warranties.

Due to findings of mortgage fraud and underwriting deficiencies in the mortgage origination process and  misrepresentation in the packaging of mortgages, banks have been experiencing a drastic increase in the number of repurchase demands they are receiving, including from Government-Sponsored Entities (“GSE”), monoline and mortgage insurers and other end purchasers of RMBS securitizations, such as the Federal Home Loan Banks.  Banks have responded by taking on additional reserves, which have had the effect of reducing mortgage income in the corresponding period.  Now, however, in a letter dated January 29, 2010, the SEC has asked JP Morgan to clarify its reserving methodology for mortgage put-backs—a process that has historically been opaque and difficult for outsiders to evaluate.

As an investor, I have long been concerned with whether the banks’ levels of reserves represent accurate reflections of their true liability.  Just to get a sense of the magnitude of this issue, in SEC v. Angelo Mozilo, the SEC alleges that Countrywide originated over $450 billion of mortgages annually during the boom years.  What percentage of those Countrywide mortgages were fraudulently originated?  What percentage are getting sent back for repurchase? Even a modest percentage could lead to substantial losses for Bank of America (“BofA”), Countrywide’s parent and potential successor in liability (see Subprime Shakeout post on recent ruling in MBIA v. Countrywide).

Additionally, there is some alarming evidence that BofA actually did assume the liabilities of Countrywide, and is thus on the hook for the liabilities of its subsidiary.  At the time of Bank of America’s purchase of Countrywide, Scott Silvestri, a Bank of America spokesperson is quoted as saying, “[w]e bought the company and all of its assets and liabilities.  We are aware of the claims and potential claims against the company and factored these into the purchase”  (emphasis added).  This led Florida Attorney General Bill McCollum, in announcing his intention to negotiate a settlement with Countrywide regarding predatory lending practices, to say, “there is technically a deep pocket.  They’ve [BofA] acquired them [Countrywide], they assume their liabilities.”

The SEC’s actions are very important in this debate over mortgage buybacks.  The SEC has asked JP Morgan to clarify its reserving methodology in the following five areas:

a)  The specific methodology employed to estimate the allowance related to various representations and warranties, including any differences that may result depending on the type of counterparty to the contract.

b)  Discuss the level of allowances established related to these repurchase requests and how and where they are classified in the financial statements.

c)  Discuss the level and type of repurchase requests you are receiving, and any trends that have been identified, including your success rates in avoiding settling the claim.

d)  Discuss your methods of settling the claims under the agreements. Specifically, tell us whether you repurchase the loans outright from the counterparty or just make a settlement payment to them. If the former, discuss any effects or trends on your nonperforming loan statistics. If the latter, discuss any trends in terms of the average settlement amount by loan type.

e)  Discuss the typical length of time of your repurchase obligation and any trends you are seeing by loan vintage.

The monoline insurers have constantly complained that banks have continued to be amenable to processing repurchase requests and repurchasing loans associated with Fannie and Freddie due to the necessity of continuing a business relationship with the GSEs.  They claim that for similar violations of rep & warranties, however, the mortgage originators have denied their repurchase requests.  This requirement from the SEC asking for clarification on discriminating between repurchase requests from the GSEs versus the monolines/other investors should have interesting consequences.  As Jay Brown, the CEO of MBIA, recently stated in the company’s Q1 2010 conference call, “we have discussed the process that Fannie and Freddie use with their folks to see how it compares to the process that we use both from examining the loans and also in terms of the accounting, and both approaches are consistent with our own.”

The SEC’s requirement to provide clarity on the counterparties to repurchase requests should lead to more fair treatment for the insurers.  The requirement to provide increased disclosure on mortgage putbacks from the insurers could also ratchet up the pressure on the banks to settle repurchase requests.  If they honor repurchase requests from Fannie and Freddie for very similar violations of reps & warranties but refuse to honor them for the insurers, continuing to litigate could lead to large damage claims for adverse rulings in court.

For investors who may not be aware of how significant of an issue this is for the banks, it is imperative to read the testimony of Richard Bowen in front of the Financial Crisis Inquiry Commission.  Dick Bowen was the Senior Vice President and Chief Underwriter for Correspondent Acquisitions for Citigroup Mortgage.  In early 2006, he was promoted to Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group.  The numbers he cites in his testimony are astounding.  I will allow his testimony to speak for itself:

The delegated flow channel purchased approximately $50 billion of prime mortgages annually… In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets. This situation represented a large potential risk to the shareholders of Citigroup…I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group…We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production. (emphasis added)

Digging through Citi’s public financials, it is unclear what reserves have been set aside to reflect the possibility of these noncompliant mortgages travelling back to Citi’s balance sheet.  The SEC’s recent letter to JP Morgan should provide increased disclosure for these types of liabilities lurking on bank balance sheets.

David Grais’s lawsuits on behalf of the Federal Home Loan Banks (“FHLB”) against investment banks involved in the packaging of RMBS securitizations that were bought by the FHLB also provide for interesting reading.  The Federal Home Loan Banks bought $23 billion of RMBS securitizations from a number of investment banks.  These structured products contained representations regarding maximum LTV ratios on the underlying mortgages.  In these lawsuits, the FHLBs of San Francisco (complaint available here) and Seattle (complaint available here) contend that widespread appraisal fraud led to incorrect LTV reps on the pools of mortgages purchased by the FHLBs.  They are suing to recover losses stemming from their purchases of these mortgage securities.  David Grais was a roommate of Supreme Court Justice Samuel Alito for three years while they were undergraduates at Princeton University.  His legal credentials and ability to undertake complex litigation should not be underestimated.

As Gretchen Morgenson writes in the New York Times, though disputes over losses from mortgage-backed securities are hard to litigate because investors must persuade factfinders that their losses were not simply the result of a market crash,

[r]ecent filings by two Federal Home Loan Banks — in San Francisco and Seattle — offer an intriguing way to clear this high hurdle. Lawyers representing the banks, which bought mortgage securities, combed through the loan pools looking for discrepancies between actual loan characteristics and how they were pitched to investors.

You may not be shocked to learn that the analysis found significant differences between what the Home Loan Banks were told about these securities and what they were sold.

The rate of discrepancies in these pools is surprising. The lawsuits contend that half the loans were inaccurately described in disclosure materials filed with the Securities and Exchange Commission.

These findings are compelling because they involve some 525,000 mortgage loans in 156 pools sold by 10 investment banks from 2005 through 2007. And because the research was conducted using a valuation model devised by CoreLogic, an information analytics company that is a trusted source for mortgage loan data, the conclusions are even more credible . . .

The model concluded that roughly one-third of the loans were for amounts that were 105 percent or more of the underlying property’s value. Roughly 5.5 percent of the loans in the pools had appraisals that were lower than they should have been.  That means inflated appraisals were involved in six times as many loans as were understated appraisals . . .

It is unclear, of course, how these court cases will turn out.  But it certainly is true that the more investors dig, the more they learn how freewheeling the Wall Street mortgage machine was back in the day.

Investors should take a hard look at bank balance sheets to understand the adequacy of reserves for this huge contingent liability.  It is not surprising that banks have stonewalled any attempt to get clarity on this issue – hopefully the SEC’s explicit demands from JP Morgan to increase their disclosure will have a knock-on effect for the others.

Menal Mehta is a Principal at Branch Hill Capital, which invests in Special Situations.

Tags: Wall Street, SEC, Banks, JP Morgan, Regulation
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6 Responses

  1. Thursday 8 July 2010

    All widow dressing for the masses. The SEC is as complicit as the rest of the gang that couldn’t steal straight.

  2. I know nothing, and if I think I know something, I know nothing.
    I don’t give legal advice because I don’t know legal things.

    If you haven’t awaken yet to the following area of the existence, ignore those statements, forgive me for my intrusion on your path, and just let it go, skip down to the **** line.

    Come out of her! Prevail over her by being on the outside, of her.
    Get out of her system (and become a nonresident alien), not a part of their jurisdiction, not a part of their country.
    No discrimination based on religion.
    Walk in your kingdom (the Kingdom (of Heaven)), which encompasses their country (greater than being just a US citizen), and remind them of your birth rights. Un-a-lien-able rights to life, liberty and the pursuit of happiness (not limited to the restricted definition of 14th amendment oppressed US citizen)
    As part of their system, (their game) you are forced to play by their rules. Stop playing! Then you can remind them that you are not in their game and not subject to their rules. They think everyone is in the game, until reminded you are not. It’s called, presumption.
    Go back to the original rights you have just by being born here, not the rights you gave away by binding to a political affiliation via voter registration.
    Coming out of her?
    AS simple as writing, “Please take me out of the system.” on the back of your voter registration card, signing and dating it, and delivering/mailing it in to the county elections office. Leaving all that nonsense behind you and let the remaining people in the system fight over and control the rights they will continue to take from the people still dependent and still left in their system.
    I did not become unemployed when I dropped out of their system; so I can say, for me, coming out of her was not tied to continued employment. Still working and I’ve been out for over 6 months now.
    This foreclosure process is ongoing, so I can’t tell you how being out of that part of the system has ‘helped’ or if it has. By the time I realize anything of value, the crisis may be over anyway. I am a non-resident alien when dealing with them in their system, and I identify myself in that fashion no matter what I ‘sign’ , at arm’s length, or that has my name attached to it in their system.

    In my opinion, and that’s all it is:
    Anything with a license seems to have a license to ‘not’ do what they are supposed to do or what we believe they are supposed to do. If they violate TILA and HOEPA, there is something in TILA and HOEPA that allows it and we have not uncovered that ‘caveat’ that allows them to ‘not abide’ by the provisions we ‘think’ they are violating.
    Assuming they are doing everything, right, and according to a ‘master plan’ of fear and theft, then what are we doing differently to not see that?

    Are we seeing what is really there, or what we want to see, or what we were told to see? I haven’t read either, as I haven’t used either to defend against any action, yet.

    If you ask a person what does ‘turn the other cheek’ mean; they will tell you that if one side of their face is struck they are to offer the other side to be struck, as in, to be a victim. If you ask me; I’d tell you that if one side of my face is struck, I’d turn the other side away from the striker, so as to prevent it from being struck too!, ie. protect some portion of myself from further injury, not being a victim.

    These provisions in these documents are ‘specific’. We love to interpret. We’ve been taught to interpret in our English classes when we read passages and poetry and had to report on what the author ‘meant’ by what was said in their story or poetry.

    Well it’s time to see it ‘as it is written’,
    “”””As it is written, so shall it be done! “””””””””””

    If it’s not there, it’s not allowed, or if it remains silent on that action and a party decides it’s okay, without the other party raising a flag to say it’s ‘silent’ or not allowed, the one who decides it’s okay, prevails for saying it’s okay, and proceeding as if it’s okay, and operating without impedance from the affected party, on something one party decided was okay; that if challenged it is NOT okay.

    I really believe a lot of what is happening is because we ‘believe’ them even when they are not being honest. We know they have been dishonest as honesty goes, yet we believe them in every part of the process. They are like magicians, got you watching one hand while they do their trick with another.

    I watched a neighbor get foreclosed on, and leave because he was told to. It was 6 months or a year before the lender went in and cleaned out the home. It appeared to me (my opinion) that they took the home (homesteaded it) because it was abandoned, and not because of their non-judicial foreclosure action that they said they did that made the neighbor move. The yard is still unkempt. If it was REO owned property, they’d owe taxes and have to maintain the property for the sake of other property values in the same neighborhood. Something is not right, and everything is not being disclosed.

    Let’s be honest with ourselves. If TILA doesn’t matter, then we shouldn’t bring TILA to our specific battle. What matters? What’s wrong? What was not done? It’s simple if we stick to what was stated and stop allowing all these ‘interpretations’ to prevail, without us raising a flag to these ‘interpretations’.

    That’s a general statement. Neil is doing a great job posting and providing this site for our learning experiences.

    I remember there use to be a term used about a ‘token ‘.
    It meant that a few of that nationality would get through to the other side, (so to speak), so the rest of that nationality would remain docile to the problems and oppressions they face with the hopes that some day they too will get through to the other side

    We witness token foreclosure cases so the rest of us will remain docile to the problems and oppressions we face, hoping some day we’ll get our win.

    Suppose you haven’t lost. Suppose the home is yours and it is ‘being’ taken by the process. What are we doing to ‘lose’ it in the process of it being ‘taken’ (stolen)? Possession has always been 99 and 9/10ths of the law. What’s different now? What are we doing to make us ‘lose’ possession? If it’s theirs, they could say ‘move out’! or serve eviction papers. What is this ‘foreclosure’ process that makes them have to ‘prove in front of a judge’, or go through such paper processes to prove their claim in non-judicial states, to get you out of the home?

    I’m telling you…every last one of those documents are flawed!
    I see people upset about how much the home was appraised.
    Find the breach in the contract! Don’t just look at appraisal, or where the note went. Look and read, and find out what is allowed.
    If there is ‘anything’, ‘anything’, ‘anything’ being done that is not allowed, you have a breach. As simple as the beneficiary abandoning their claim. We accept them telling us that an ‘assignment’ is normal. Well for MERS it probably is because of how that document was written. But if you don’t have a “MERS” loan, is it normal? I say, in my opinion, it’s not! We let these cases be the one size fit all, when each is ‘specific’. My Deed does not mention things a MERs Deed mentions that allows for an Assignment of the Lender or assignment of the beneficiary. Mine is specific!

    Stick to that like a broken record and prevail.
    No law impairing the obligation of contracts shall be made.

    I can’t say when we win, because they have enough money to drag this on for years. But if they drag it on after their stage 1 attempt, then you must have some power that they won’t reveal, and all the other stages are being used to redirect your attention so you will drop the ball and argue an unnecessary point so they can prevail.
    If your broken record ‘breach’ gets you past stage 1, then don’t allow deviations and other ‘irrelevant’ statements redirect you into fighting over something else.

    I got a letter from a title company telling me they have legal title to my home and I don’t fit the definition of a tenant in my home and if I don’t respond they will sue me.

    Now I can jump on the fact that they have legal title, or the fact that they said I am not a tenant in my own home, or I can be basic and respond…’who are you’, why do you contact me, why do you threaten me with a lawsuit, and that legal title you are holding is ‘still’ mine and by possessing it, it must have been fraudulently conveyed to you. It was entrusted with another entity, a trustee for the benefit of another entity, a beneficiary, and that trustee must have breached his fiduciary duties and conveyed to you it without my knowledge or consent, but I have never relinquished my rights to the legal title to my property, so you currently are holding in your possession, what is mine. I demand the return of my property. If a suit initiated by you will return my fraudulently conveyed property to me I look forward to having it returned to me.

    See by any other argument, I could ‘contract’ a loss of ownership of that title, by ‘fussing’ about the illusion thrown my way about whether I’m a ‘tenant’ in my own home.

    What’s basic? what’s simple?

    Take me to court? Rather than trying to get me to fit their definition of a tenant, in my opinion, they’d have to explain how they came about having possession of my legal title to my property when they weren’t part of the initial real estate transaction (Deed of Trust) (which isn’t trustworthy).

    People will continue to (quote) ‘lose’ (unquote) because they chase too many carrots. One thing at a time, (please), is what I say. I am not going to be diverted by ‘any’ detracting statements. I will stick to the basics of my claim. They have all the time in the world and so do I, to protect what I consider mine. I am not going to deviate from what’s mine and argue with them ‘that it’s not theirs’.
    If it’s mine, why am I arguing that it’s ‘not yours’.
    I won’t argue that my shoes are not your shoes.
    I will just firmly state, ‘These are my shoes’.
    I hear what you are saying, but these are my shoes.

    You won’t find me in court arguing, ‘these aren’t their shoes!’.
    Then a judge would gain jurisdiction that they have to referee the disagreement of ownership.

    If I was in court, I’d say, ‘these are my shoes’, and like a broken record stay with that; and let them prove why they claim it’s their shoes, and why they brought me to court to take them.
    I’d stick with the basics of my case, not their case.
    It takes two to argue.
    If there is no disagreement on my ownership, what can the judge decide? Who can the judge make a decision for? I say it’s mine, I’m living here, been here for years, possession is 99 9/10ths of the law, and they want me out? Hmm…who has to prove their case?

    Light and Love,

  3. AS an _INVESTOR? meaning you?Or is that a Quote from the letter?

  4. SEC,IRS,FRB, MBA, BLA BLA, consumers are the dregs of the equation , whether or not its bankruptcy or financial plunder . Investors are [them] consumers are [us], we are the crop for slaughter not for saving.we are expendable , isnt this obvious by now?.
    Consumer Protection is not a major part of the banking industry !? no it is merely the thorn in their side the keeps it from becoming a full on gang rape.
    As consumers [ ha ironic is the name] we are groomed for harvest or to be consumed by the greed mongers…aka banksters.

  5. J in CO


  6. The need to dig even deeper in to the derivative contracts has to follow. With JP being the 46% owner of global derivatives they have to start seeing that they played the lead role in tipping the dominos to cause the economic collapse. All for profit.

    My question is why is it always the investors that seem to get protected when Consumer Protection is a major part of the banking industry? Why are banks allowed to ignore consumer protection statutes such as TILA and HOEPA and steal homes they have no economic damage in?

    Who really owns the private placement portions of the protected or swapped tranches of the MBS pools?

    And you wonder why Dimon paid every politician he could to stop the transparency into derivatives?

    C’mon SEC if we can see through the BS why can’t you?!

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