The Greatest Fraud Ever - Part 2

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Banker claiming incompetence not criminality (shutterstock)

JPMorgan Chase is the largest investment bank in the United States.

JP Morgan got into the lucrative business of assembling packages of subprime mortgages as did Fannie Mae then selling them to clients with the assurance that it had reviewed the packages to ensure that the loans met sub prime lending standards.

This grouping of mortgage-backed securities (a type of derivative) was known as the collateral debt obligation — the infamous CDO. The collateral is the house pledged in support of the loan; the loan is the debt.

JP Morgan’s worst nightmare had its origins in 2006, when it hired a young Canadian lawyer, Alayne Fleishman, as a transaction manager — a quality control function to vet the mortgages . Fleischmann naïvely thought that her job was to actually identify bad loans and bring them to her boss’ attention, which she conscientiously did.

Soon, the manager of her department told Fleischman and her coworkers to stop sending him emails. As a lawyer, Fleischman knew that it was essential to have a paper trail to prove due diligence for government inspectors. Demanding that she leave no record was troubling.

It got worse. She and her colleagues identified so many applications that couldn’t pass the smell test that she decided to write a letter to the higher-ups. As one example, she told of a manicurist who claimed an income of $117,000 per year with no proof. Fleishman knew that manicurists made about $20,000.

This type of application was known within the bank as a “liar loan” but later became infamous as ninja loans. There was no check into the applicant’s income claims; they weren’t even required to show a copy of an income tax assessment notice.

She believed, as a lawyer, that her one letter would be enough evidence to convict the bank of criminal fraud if it continued. The senior bankers would know that and would stop. Ordinarily that would have been true. What Fleischman didn’t know was that a bank had no worry about criminal prosecution fin the USA.

A few months after the whistleblowing letter, she was fired. She made some attempts to get another job on Wall Street, but realized she had likely been blacklisted and returned to her native Canada.

After the 2008 crisis, she watched as the government announced investigations into bank conduct and waited to be contacted. Nothing.

In response to the Occupy Wall Street protest, Obama assembled a Justice League-like SWAT team of the best and most aggressive investigators and prosecutors from all the U.S. government departments. This team of super prosecutors would surely get to the bottom of what happened.

A couple of investigators called her; then, again nothing.

One morning, while strolling through a mall, a newspaper headline caught her eye. It announced a civil lawsuit by the U.S. government against JPMorgan, based on an internal letter sent by a former female employee. She was startled because she had heard nothing about this for so long. How could they start a lawsuit in Washington without speaking to her, their prime witness?

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Holder handing to bankers accused of fraud (shutterstock)

As she read, she learned that the investigation into J.P. Morgan was so important that the Attorney General, Eric Holder, took command of it himself. Okay that’s a spoiler to any reader who recognizes that name. They will know the outcome. But bear with me — there’re still a few twists that even a jaded reader, who has seen it all before, will find a little hard to believe.

Within a few days, the media reported that the lawsuit would not proceed. The government touted a $13 billion fine against JPMorgan as a sign of the government’s serious commitment to clean up the banks. No jail for any banker for the billion dollar sized fraud.

Five billion was earmarked for consumer relief qualified by a footnote that it would only be given if they were entitled to it under existing agreements anyway. Fleishman commented on this pretzel logic, ““It’s not real. They structured it so that the homeowners only get relief if they would have gotten it anyway.”

Another win, the government let the bank deduct everything but 5 billion from its income tax. Thus it appears that the entire among was tax deductible each set the $5 billion which was likely not going to be paid any.

But the best is yet to come. The bank got the government to agree that it did not admit fraud, but only to “mortgage irregularities”.

For negotiating this sweetheart deal Trump called JP Morgan CEO, Jamie Dimon, worst bank CEO ever, saying Dimon should not have paid a cent but fought the charges.

This settlement related to civil claims and specifically kept the possibility of criminal charges alive. Fleischman hoped those would proceed, but she knew the five-year limitation period would soon expire. (As it now has.)

Months passed. In 2013, Fleischmann saw a news clip of Eric Holder giving a speech at NYU, boasting that the JPMorgan settlement taught the banks that the DOJ was serious about prosecuting them. Holder justified his “Holder Doctrine” of too-big-to-fail. Then came the words that alerted her that the criminal proceedings would definitely not go ahead and that the DOJ was helping to cover up the fraud. “I am resolved to seeing [the investigations] through.” Doing so, he added, would “reaffirm” his principles.

Or, as Fleischmann told Taibbi, she had translated it: “I will personally stay on to make sure that no one can undo the cover-up that I’ve accomplished.”

Fleischmann was disturbed at the obvious double speak. “I tried to go on with the things I was doing, but I just stopped sleeping and couldn’t eat,” she she told Taibbi. “It felt like I was trying to keep this secret and my body was literally rejecting it.”

She had a confidentiality clause in her employment contract. As a lawyer, she well knew that if she spoke up even to reveal criminal conduct, she would be persecuted as all previous whistleblowers had. At the minimum, they would use the cost of defending a breach of confidentiality lawsuit to drive her into bankruptcy. No government and no court in the U.S. or Canada would come to her aid. Neither would the public. It would not understand what was happening.

Finally, Fleischmann could take no more. “The assumption they make is that I won’t blow up my life to do it,” Fleischmann told Taibbi. “But they’re wrong about that.”

In spite of the risk of bank retaliation, she decided to expose the cover-up. Matt Taibbi of Rolling Stone broke the story. It got little coverage anywhere else and effectively died.

While I believe Taibbi is one of the most insightful journalists covering the financial system, the big question is why Rolling Stone first. And why didn’t the NY Times or the Washington Post pick up the story and make it a front-page item?

Eventually, the DOJ threatened 18 other banks for civil fraud as with JPMorgan. All quickly admitted liability so the statements of claim with the detailed allegations of fraud were never made public and got almost no coverage in the media.

Other bank settlements included $16.6 billion from Bank of America, $7 billion from Citigroup, and $3.2 billion from Morgan Stanley. A difference though—these settlements actually used the f word in place of “irregularities”.

However, the banks had effectively put off admitting fraud until the criminal limitation period had expired — but more importantly, when the voting public had long grown bored of hearing about the 2008 crisis.

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Written by

Trial lawyer, has taught Business Law at the University of Toronto, Author, Critical Concepts Canadian Business Law @JanWeirLaw | http://jdweir.com

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