I didn’t get a chance to ask this of former Bear Stearns banker/analyst Chris Whalen (we ran out of time), but over in The Atlantic, Teri Buhl reports on some very ugly litigation with Bear.

Apparently, some 80% of these Bear Stearns loans sold to Ambac went bad almost immediately

Here’s Teri:

“Former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at Bear. According to e-mails and internal audits, JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through legal maneuvering. Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was unsealed. The lawsuit’s supporting e-mails, going back as far as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a “sack of shit.” . . .

In 2007, when Ambac started to realize something was very wrong with its high-rated bonds, it demanded Bear provide loan-level detail and reviewed 695 non-performing loans in its portfolio. Ambac’s audit concluded that 80 percent of the loans showed an early payment default. This meant they should have never have been packed in the bonds Bear sold and were required to be repurchased. Bear refused, and of course had already been pocketing buyback money for itself from the originators. Bear also never told investors that its auditor Price Waterhouse and Coopers submitted an internal review in August 2006 that this repurchase process was not in-line with its due diligence standards and not typical for the industry. By January 2007, a Bear internal audit also reported the firm had collected $1.7 billion in repurchase claims — a 227% increase over the previous year. Yet Marano’s group of traders continued their double-dip payment scheme and kept selling the toxic loans with full awareness of the poor quality of the due diligence.”

Go read the full Atlantic piece — its a hoot.

E-mails Show Bear Stearns Cheated Clients Out of Billions
Teri Buhl
Atlantic, Jan 25 2011

Category: Bailouts, Legal

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “Damning Email: Did Bear Cheat Clients of $ Billions?”

  1. chartist says:

    With the CEO attending a bridge tournament the day Bear finally imploded, do you think there was ever any oversight at this company?

  2. michael-D says:

    “I didn’t get a chance to ask this of former Bear Stearns banker/analyst Chris Whalen (we ran out of time)”

    was there an interview or roundtable or something? when was it, and can you provide a link to the video?

    thanx in advance

  3. wally says:

    Reading things like this is no longer a surprise.

  4. Petey Wheatstraw says:

    This is civil litigation. Where are the criminal investigations, indictments, and prosecutions? Where is my government? FBI? SEC? Special Prosecutor(s)? It’s not like they’d have a difficult time busting this enterprise up, as you can’t analyze one mortgage or MBS without tripping over massive and organized criminal fraud. The fleecing continues unabated, as law enforcement looks the other way. Our entire government has been captured by corporatists. The electorate is too feckless and/or dimwitted to understand, much less protect, its own best interests.

  5. chartist says:

    SEC, FBI? Don’t make me laugh….At this point, I am ready for some Russian mafia style justice.

  6. AHodge says:

    kickin ass and takin names, i like the names part
    one of these decades a reasonably complete history will be out
    ABK one of my first shorts in 2007, but i managed not to make money
    real bad timing
    but i like to think i know these guys
    went long for a day early last year on the fed talking help, wnt from $1 to $2. Nice. i want MY bailout.
    they massively bankrupt
    but being an insurance co not illiquid
    cant be long them now though the commissioner possible split of the non stinking part
    or massive legal success could save them
    i like being long fannie much better. I WANT MY BAILOUT!!!!

  7. cognos says:

    This is a overly simplistic piece. You dont seem to actually “grok” the mortgage market.

    These packaged loans were ALL ACKNOWLEDGED to be HIGH RISK.

    If you dont understand that, you dont understand “mortgage insurance” and the role Ambac played AT ALL. Your just being a naive person.

    This system WORKED and was EXTREMELY PROFITABLE for all… for over a decade. Really almost 2 decades. Thats why all were involved. Ambac is a big boy, no?

    Then the market changed. Housing prices no longer went up. In fact house prices went down many multiples of what was thought possible. Is this the reason for the losses? Or is it because of fraudulent behavior on the part of Bear Stearns?

    Seriously, if you do not know the answer to that last question… maybe there is a hairdresser job for you? Maybe you’re a celebrity chef at heart?

    The ignorant witch hunting is awful.

  8. rktbrkr says:

    Are BS and CW/BAC the exceptions, the outliers or was this common practice? weren’t there damning emails revealed during the GS dog n pony show in front of Congress?

    Going to be some golden times for US lawyers, best stuff since Bhopal and less travel!

  9. jjay says:

    Petey Wheatstraw Says,
    PWS, you are confused.
    Wall Street and the big banks see Congress and the POTUS as their compensation committee at best, and as their bitch at worst.
    The Federal government sees you and I as the enemy of themselves and their pimps on Wall Street.
    We are a nuisance that they have to put up with every election and go through the motions of listening to when we write letters and complain at town hall meetings.
    Given the opportunity that some trumped up “emergency” affords, they will stop the elections and just stay in unopposed power for the duration.
    RICO indictments for their pimps are not ever going to happen.
    All the positions of finacial power in DC are held by GS alumni.
    We are screwed, so to speak.

  10. WFTA says:


    If the investors successfully sue the crooked investment bankers, will we have to bail them out again?

  11. Petey Wheatstraw says:

    cognos Says:

    “ . . . This system WORKED and was EXTREMELY PROFITABLE for all… for over a decade.” “. . . Or is it because of fraudulent behavior on the part of Bear Stearns?”

    So did Madoff’s, and his was “profitable,” too. Like most scams, it worked right up until it didn’t. That there was fraudulent behavior (industry-wide), is not beside the point, it IS the point.

  12. Mannwich says:

    @Petey: Honestly, I wouldn’t bother.

  13. cognos says:

    Petey — NO! It was actually profitable. Everyone made money. Housing is still UP 2x from 1993 levels… in many places more like 4x. ALL those mortgages got paid, the bankers got paid, the investors got paid for longer than a decade.

    Nothing like Madoff.

    Investments involve risk. Just because the internet bubble became a highly speculative bubble… then bust. Just because the bust was spectacular (it was!). Does not mean it has ANYTHING to do with Madoff.

    Welcome to investing. You might lose money (duh!).

    You might make tons more $. See GOOG.

  14. cognos says:

    The basic point missed in this piece… is that YES… this stuff was “shit”.

    The ONLY reason to have a mortgage insurer like Ambac involved is because its the lowest quality stuff. Seriously, a NINJA (no income, no job, no assets) loan… did not need to involve AMBAC. Ambac stuff is WORSE(!!!) than that.

    Thats the whole point of some low income, first-time homeowners with 2% down paying Ambac another 1% annually. Ambac insures the other 18% of the downpayment. They KNEW they did the absolute worst, highest risk mortgages. Thats their whole f-ing business.

    And the funny thing is… when house prices go up… its a no brainer. Everyone wins. And even if they just dont go down big… everyone is fine. So then we had 2 decades of a winning business and 2 years of a downturn. (Actually, seems like one just reloads on all that… not really a big deal right?)

  15. b_thunder says:

    A. Lawsuit against JPM? The bank that literally owns the Fed and does the Fed’s dirty work? The Fed “sponsored” the “takeunder” of Bear by JPM. Whatever JPM will have to pay out for the “sins” of the Bear will be filly reimbursed (directly or indirectly) by the Fed. We better let this slide, otherwise the taxpayers will be on the hook again!

    B. The ex-Bear execs who in a country like China would have been executed long time ago (and their possessions confiscated) and would have been sharing cell with Madoff in the countries not fully owned by their financial industries, now run Ally (GMAC, Geithner’s pet project), BofA (bailed out number of times) and the Squid? Only in (dying, collapsing, degenerating, digging its own grave) America!

  16. Transor Z says:

    According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds.

    Sometimes I find it’s helpful to actually read the subject article and the fraud allegations it refers to first — before offering up non-contributory commentary about Ambac and the mortgage market. But I’m crazy like that.

  17. AHodge says:

    cognos you are completely clueless
    spite of working there and bein a stooge
    ABK did not do individual mortgages thats the likes of PMI MTG. they insured pools
    and really badly as you point out. but they are not doing the orig themselves.
    they have to take someones word. We went through this before and you massively conceded.
    the legal system just isnt working the way you dream it does

    i also shorted MTG and PMI in mid 07. and that would be when nationwide house prices were roughly flat, if you try to argue its all the massive price decline you off by about 8 months, got it? these folks were ignorant on far more massive scale, but partly from their clients lying to them.

  18. Topspin says:

    Cognos, get your finger out of the peanut butter jar and come get cleaned up. Your dinner is almost ready.

  19. The thing about business litigation is that hardly anyone arrives with clean hands. It’s just a question of whose hands are dirtiest. Ambac apparently believes, or is going to try and prove anyway, that its lack of proper risk management is trumped by Bear’s fraud. Without knowing all the details, it’s very difficult to know, but if Bear was actually selling mortgages back to originators and not telling Ambac about it, and then pocketing the money for itself, while also selling the mortgages into an MBS, well that’s pretty dirty hands that may make Ambac’s incompetence at underwriting excusable. How can risk be properly managed when the insured is lying?

    Cognos is correct in the sense that Ambac wasn’t some unsophisticated dupe in the matter. It knew full well that its success hinged on the continued appreciation of real estate values. That’s why it was willing to insure against the risk created with the lack of a down payment. If property values had kept climbing, their insurance premiums (charged to the borrower) would have been free money, like AIG thought about their insurance premiums generated by CDO insurance.

    O/T sort of, Countrywide just got sued again, for fraud in selling MBS’s to investors:

    “The investors claim they bought hundreds of millions of dollars of Countrywide mortgage-backed securities from 2005 to 2007 because they wanted conservative, low-risk investments. They said they relied on term sheets, prospectuses and other materials provided by the firm that were recklessly or knowingly false.

    “Countrywide was an enterprise driven by only one purpose — to originate and securitize as many mortgage loans as possible into MBS to generate profits for the Countrywide defendants without regard to the investors that relied on the critical, false information provided to them with respect to the related certificates,” according to the complaint.”


    ~How’s that Countrywide purchase working out for ya’, Bank of America? At least you’ve still got Merrill.

  20. libarbarian says:

    Throw them in jail. Seize their assets. Throw their families on the street.

  21. http://www.squattable.com/



    “Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs.” –Thomas Jefferson


  22. ashpelham2 says:

    From the perspective of someone who once worked in public accounting for the firm mentioned in the article, I just cannot believe anyone would want to be in that business anymore. Sure, there are lots of fees to be made and big bucks to turn over, but it’s almost becoming yeomans’ work with the size of the litigation that sunk Arthur Anderson, threatens Ernst and Young, and PwC bringing themselves into question with this article. God bless America. How can anyone who receives a fee to deliver something desirable to the customer be independent in their evaluations? It’s just a non-starter. Make all public accounting firms for profit-public entities be brought to government level reporting, not just shareholder reports. The IRS returns aren’t enough. Fine if you’re a small to mid-size firm that is doing a lot of non-profit, yellow-book audits. You’re required to do them anyway, and you’re fee is capped as it is.

    It’s no wonder there’s been so much consolidation in that industry.

  23. Rescission says:

    Cognos, rktbrkr, and Petey: Respectfully, you all three are missing the point here.

    This is totally different from the GS situation. Totally so, if you understand this business.
    If this article is true, then Bear was committing criminal fraud.
    First and worst: Selling bad loans (early pay defaults) back to originators and pocketing the money rather than properly passing the proceeds on to the trust investors who own the loans. This is stealing.
    Second: Changing the deal terms around early payment defaults to shove loans out quicker without having to buy them back. I am not sure this is criminal, but surely would be bad faith, misrepresentation and would be subject to civil suit and Bear would lose IMO.
    The only thing I don’t understand is how they handled the actual ownership of the loans. If originators were forced to buy back the loan, then they would own the loan. How could Bear have conveyed legal ownership of the loans if they weren’t signed back over by the trust? This part doesn’t make any sense.

  24. AHodge says:

    to be clear
    several here repeat the Warren Buffet fallacy, it was all or nearly all house prices. Wrong.

    1.the whole blowup no more than 70% housing broadly defined. there were auto loans, commercial construction, all kinds of “asset backed” .there were fake assets of many kinds, bad accounting, fake insurance incl CDS of all kinds. The collapse of securitization, only partly housing, was a key driver.
    With none of the latter fixed we could do this all over again next time in areas besides housing.

    2. the housing related losses were far larger than the mortgage defaults. There were the synthetics added on, huge margins in CDOs, illiquid leveraged positions, etc etc.

    3.the mortgage losses were far larger and earlier than implied by house prices. Some pools had 10% with no first payment! a strong indicator of fraud. sometimes there is no house Claus. no house at the listed mortgage address, or NO SUCH ADDRESS. then so many shades of fraud less laughable than that. Subprime and SIVS had massively blown up by Sept 2007 when house prices still nearly flat.

  25. Rescission says:

    Very true. We saw it starting to crumble in the fall of 2006 when Early Pay Defaults starting hitting, and being put back to the originators. I peg the fall of 2006 as the time this started.

    However, all the crazy fraud causing most all of the First Pay Defaults were stuff like vacant houses, straw buyers, flips, and false income being claimed. None of this was instigated by the Wall Street companies buying and securitizing the loans. This type of fraud was being perpetrated by bad mortgage brokers, dirty loan officers in brokers’ offices and “investor” borrowers bent on scamming the lenders. This is not to exonerate originators or securitizers, but as someone who was there, I can tell you that we had solid due diligence and we still got burned by fraud from brokers and borrowers. Our “bad broker list” of those we were cutting off grew every month.

  26. cognos says:

    Recission – this is wrong silly and makes no sense. The whole issue is whether the mortgages were “too risky” / “too bad” and deserved putbacks… but the case is being brought now. Sounds weak.

    Your description of the issue makes zero sense — this would’ve been apparent immediately. That is, if there was no mortgage payer or some wierd outright theft (make no sense, because times were good) that would not take 3+ years to uncover and sue for.

    AHodge — similar. Your points are wrong, silly, and make no sense. Stocks went down too, right? But this was not a “stock market crisis”. Apple went down from 200 to 85. But this was not a “smart phone crisis”. This was a real estate bubble. Any other interpretation is missing the SINGLE, BIG ISSUE.

    1929, late 1970s, and late 1980s were also real estate bubbles. Recovery looks quite similar to the more recent 2 situations.

  27. Sunny129 says:

    Just sickening!

    What’s the purpose of keeping it sealed till now? Whose interest got furthered? NOT certainly the those of investors or the public!

    Nothing is surprising any more. What’s surprising or should say shocking is that NONE of these perpetrators are behind bars or not even under indictment!

    The charade continues unabated and the Banksters have no limits on SHAME being heaped!

  28. maddog2020 says:

    reading through these comments makes me think some of you didn’t actually read the Atlantic piece.

    And this comment: “Cognos is correct in the sense that Ambac wasn’t some unsophisticated dupe in the matter. ”

    So that makes fraud OK? Like, armed robbery is OK, as long as the other guy is armed, too?

  29. AHodge says:

    cognos apparently you named youself
    as no one else would
    dont let any of us confuse you with the facts
    INAL but this remains you delusionally saying our system is only buyer beware, when the legal system says there are forms of fraud.

  30. cognos says:


    I read the piece. My comments are all spot on. The piece… actually… has almost no factual data or details. It does not appear to be written by someone with an indepth knowledge of the mortgage markets, legal contacts, etc. There are very few hard facts in the article.

    “Armed Robbery” involves a gun. Contracts written between 2 different $10B companies can NEVER, EVER, EVER be anything like “armed robbery”. I promise you every financial contract says… “Do your own diligence.” “These investments may lose money, even immediately. They are very likely to have serious losses in a large downturn in the housing market”.

    So if one $10b company signs that contract because they want to MAKE the PROFIT… dont they deserve the losses?