Maybe Jamie Dimon wasn’t so clever with Bear Stearns after all. Back in March 2008, the JPMorgan chief executive looked pretty shrewd picking up the collapsed investment bank on the cheap, even after raising his offer five-fold to $10 a share. Dimon stuffed the Federal Reserve Bank of New York with $29 billion of Bear’s worst-looking mortgage assets. Not only did those securities wind up making money, but a new lawsuit filed by New York’s top lawman shows that JPMorgan didn’t cover all its bases.
Bear’s home loan-backed assets were in the red for a while at the New York Fed. Inside JPMorgan, which retained only the first $1 billion of losses, they might have damaged Dimon’s fortress balance sheet during the darkest days of the crisis. They did eventually turn a profit for the central bank, as Dimon had suggested they could. But that took almost four years.
The legal liabilities of buying Bear Stearns won’t go away, though. That was to some extent expected – and JPMorgan set aside a chunk of money to cover such costs. It has already settled a number of Bear-related claims, relating to both mortgages and auction-rate securities.
Those were manageable, though others are pending. The latest case, a civil suit filed by New York Attorney General Eric Schneiderman on Monday, could dwarf expectations. The allegations – the first to originate from the Residential Mortgage-Backed Securities Working Group established by President Barack Obama – claim Bear systematically abandoned underwriting guidelines and that management failed to act when it was brought to their attention.
The result is that investors allegedly lost $22.5 billion, or roughly a quarter of the face value of more than 100 mortgage bonds the defunct bank structured and sold in 2006 and 2007 before Dimon’s bank bought it. JPMorgan argues they are “recycled claims already made by private plaintiffs.”
There are also suggestions that Schneiderman may have jumped the gun. Two government officials in Washington told Reuters that most of the investigation was carried out at the federal level. Even so, if this latest attempt to punish Wall Street for mortgage abuses succeeds, Dimon will be left wishing he’d been tougher still when negotiating with U.S. authorities.