Audit Notes: Wall Street fraud and coverup

JPMorgan "flouted quality controls and ignored problems, sometimes hiding them entirely"

The New York Times has a tough report on newly uncovered emails that show Jamie Dimon’s JPMorgan Chase knowingly misled customers about how bad some of its CDOs were.

According to the court documents, an analysis for JPMorgan in September 2006 found that “nearly half of the sample pool” — or 214 loans — were “defective,” meaning they did not meet the underwriting standards. The borrowers’ incomes, the firms found, were dangerously low relative to the size of their mortgages. Another troubling report in 2006 discovered that thousands of borrowers had already fallen behind on their payments.

But JPMorgan at times dismissed the critical assessments or altered them, the documents show. Certain JPMorgan employees, including the bankers who assembled the mortgages and the due diligence managers, had the power to ignore or veto bad reviews.

In some instances, JPMorgan executives reduced the number of loans considered delinquent, the documents show. In others, the executives altered the assessments so that a smaller number of loans were considered “defective.”

Hard to prosecute anybody, though.

— William D. Cohan has a good Bloomberg View column on a new Barclays scandal, in which an $8 million a year executive shredded a report from an outside firm that found “It is culturally acceptable at BWA, from the top of the organization down, to ignore, put off, and even deride risk and compliance issues.”

As reported first by the Daily Mail of London, Tinney had the Genesis report messengered to his Surrey estate last April. (At that point, the bank’s CEO was Robert Diamond.) Horrified by what he read about the business he was supposed to be managing, he fed what he thought was the only copy into a shredder and, according to the paper, “denied all knowledge of it ever having existed.”

That might have been the end of the story, except that in September an anonymous whistle-blower — probably a Barclays insider — e-mailed Jenkins, who had just replaced Diamond, and Marcus Agius, then Barclays’s chairman, and told them the wealth division was “deeply flawed,” had a “corrupt culture” and oh, by the way, why don’t you see if you can get your hands on the Genesis report. Thinking he was still getting away with his scheme, in early October, Tinney authored a portion of another report to Jenkins about the wealth business but omitted any mention of the damning Genesis report…

Yet Tinney’s story has barely caused a ripple on Wall Street or in the financial press.

— The government is at least finally getting tough with S&P, the credit-ratings firm that was a linchpin in creating the mortgage bubble and financial crisis. The Justice Department is suing the company for $5 billion for fraud.

But (there’s always a but) Jonathan Weil has a hilarious column on why this case may not be so airtight: It turns out the feds’ case hinges on saying S&P defrauded the Wall Street banks who created the toxic CDOs in the first place.

For nine of the CDOs, the government’s complaint listed Citigroup as the harmed investor — without mentioning that Citigroup’s investment-banking division had managed the bonds’ offerings. The complaint identified Bank of America as the defrauded CDO investor in two instances, also without mentioning that its securities unit underwrote those bonds.

It’s a novel concept. If only S&P had given honest opinions to Citigroup and Bank of America — which were paying S&P millions of dollars for ratings — then the banks would have realized they were buying ticking time bombs from themselves. And who knows? Maybe they could have found some other hapless chumps to immolate instead, if S&P had told them in time.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,