The New York Times has a very good look today at what the Ambac lawsuit against JPMorgan Chase could mean in continuing to unravel the sordid CDO story.

Remember that suit was unsealed two weeks ago and revealed that Bear Stearns had demanded repayment for shoddy mortgages it had bought to bundle, slice up, and sell—while denying repayment to the saps who had bought their toxic products.

Reporter Louise Story advances the ball nicely today, reporting that it wasn’t just Bear Stearns that got money back from the mortgage lenders:

Interviews with more than a dozen former workers at several big banks, including Lehman Brothers and Deutsche Bank, suggest that several banks received millions of dollars at a time in such payments, known as early-payment-default settlements.

And Story reports that it’s unclear whether—or how much—of these refunds Wall Street passed on to the investors who they stuck with the garbage. She says the accounting trail is “murky.”

No doubt.

But perhaps most interesting to me is this (emphasis mine):

It seems there was no standard accounting of the payments among the various banks, particularly in cases where banks received future discounts or other benefits instead of cash.

At the mortgage company New Century, for instance, banks agreed to reduce the number of souring loans they returned to the originator in exchange for the right to buy some of the originator’s next batch of loans, according to testimony given to Michael Missal, a lawyer with K&L Gates who prepared New Century’s bankruptcy report.

That deal with New Century was valuable to banks because they needed more mortgages to keep their lucrative mortgage bond machines going.

It’s unclear whether the Times put this piece of the puzzle together or if Ambac’s lawyers did. Whatever, it’s good sleuthing and it shows the bad faith of banks in their dealings with both sides.

If it’s true, and there’s no reason to believe that it’s not, it’s explosive. It would mean that Wall Street knew that the securities it was creating were fraudulent; that it not only knew it, but it demanded refunds from originators like New Century while denying investors demands for refunds themselves on the same loans. And most damningly, despite knowing all this, Wall Street then went back to the trough to get more shoddy loans from New Century.

All the white-shoe lawyers in Manhattan can’t explain that one away.

Last time I got sold a bill of goods by someone, I didn’t go back and load up on more of their stuff, did you? The only reason you would do that is if your business model was based on buying as much junk as you can, selling it, and then pocketing the difference.

And indeed, that’s what the securitization model was all about, and that’s why it makes perfect sense that the banks would go back to companies they knew were corrupt for more mortgages.

Wall Street knew these companies were corrupt all along. Indeed, demand from Wall Street is one of the main reasons the Ameriquests, Countrywides, and New Centurys got so corrupt in the first place.

If you know or suspect that the product you’re selling is comprised of fraudulent loans and you don’t tell your customers—heck, even if you do tell them—you’re committing or complicit in fraud.

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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 rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.