Four years later, we learn why Jamie Dimon's JP Morgan Chase settled US fraud allegations for $13B

In 2013, DOJ lawyers showed JP Morgan Chase CEO Jamie Dimon a draft of a 92-page complaint against his bank. Dimon coughed up $13B to settle the case, and the complaint was sealed, leaving us all to wonder exactly what kind of red-handed fraud convinced Dimon to part with what was then the largest financial misconduct settlement in US history.

In retellings of the subprime crisis, Dimon and his bank have been held out as saviors of a sort, having stepped up to acquire and thus rescue Bear Sterns and Washington Mutual, sparing them the collapse that Lehman Brothers had suffered. Dimon has been oblique on the matter of the settlement since, calling it "unfair" and refusing to discuss it in detail.

New York First Amendment attorney Daniel Novack has successfully prised a copy of the complaint loose from the DoJ through a Freedom of Information Act lawsuit, and while the memo is widely redacted, it offers some insight into exactly how much criminality was taking place in the halls of JP Morgan Chase in the runup to the collapse.

A lot.

The memo asserts that JP Morgan Chase systematically defrauded the government and its customers, mislabelling junk mortgages as good risks, a fraud that eventually cost Dimon's customers "billions of dollars." The complaint highlights the role of Securitized Products Group chiefs Christine Cole and Bill King, who are said to have made millions in bonuses thanks to their role in deliberate fraud.

The DOJ says that Morgan knowingly bought defective loans from other financial institutions, with the intention of quickly securitizing them and passing them off on their sucker/customers. They say that this conduct continued after Dimon had been made aware of it and warned his subordinates that it was putting the bank at risk.

According to Wagner's draft complaint, after JPMorgan received the third-party report showing the defects in the mortgages, the company's bankers "manipulated" the results by re-categorizing the defective mortgages because of "missing documents," which lowered their risk assessment and made them appear to comply with the bank's underwriting standards. But, according to Wagner's unfiled complaint, "these missing documents were not delivered" and despite "knowledge of the material defects in the Countrywide pool," JPMorgan Chase nevertheless bought 99 percent of the mortgages, and securitized all but seven of them into what became known as JPMAC 2006-CW2. Furthermore, the bank "did not inform investors of material amount of materially defective loans" that created the security. Wagner's complaint, drafted seven years after the security was issued, noted that JPMAC 2006-CW2 "has suffered hundreds of millions of dollars in cumulative lost principal balance, and more losses are projected." The complaint noted that although the top tranches of the security were once rated AAA, they had since been downgraded to "junk bond" status or below. And some had defaulted.

In another un-redacted example from Wagner's complaint, a mortgage-backed security that JPMorgan Chase underwrote in February 2007—relatively late in the cycle—for some $980 million contained around 35 percent of mortgages originated by GreenPoint Mortgage Funding, Inc. The mortgages, which were drawn from two pools with unpaid principal balances of $459 million and $300 million, respectively, had many of the same underwriting flaws as found in the Countrywide mortgages. Once again, JPMorgan hired a third-party consultant to look at a sample of them and to report back to it about their quality. Approximately 25 percent of the sample evaluated came back as containing unacceptable risks because of the low quality of the initial underwriting. According to Wagner's draft complaint, "JPMorgan had knowledge that a substantial portion of the loans did not comply with the originator's underwriting guidelines and had a substantial risk of default." The bank packaged up the GreenPoint mortgages and sold them anyway. In the end, investors suffered "hundreds of millions of dollars" of losses on that one security. In all, the unfiled document concludes, JPMorgan Chase and its investment bank "reaped substantial profits from their fraudulent scheme, having sold over $25 billion in nonprime RMBS"—residential mortgage-backed securities—"certificates backed by toxic loans."

[William D Cohan/Vanity Fair]

(Image: World Economic Forum, CC-BY-SA)