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If there was
ever a news story that crystalized the total corruption of Wall Street, this is it. What
follows here is a synopsis and simplification of this report.
The facts of
it were exposed in an explosive Atlantic magazine story, published last year,
called, "E-mails Suggest Bear Stearns Cheated Clients Out Of
Millions." The story begins at Bear
Stearns, where a shyster named Jeff Verschleiser used to work -- up until the
company fell apart, in large part because of the crooked schemes he devised and
implemented.
Verschleiser
headed Bear's mortgage-backed securities (MBSs) operations and he engaged in
what at the time was the industry-wide practice: putting together gigantic packages of crappy subprime mortgages and
dumping them on unsuspecting clients in the form of (bundled-mortgage)
investment securities (MBSs) that were toxic from the get-go.
But
Verschleiser went beyond that. According to a lawsuit later filed by bond
insurer Ambac, Verschleiser also masterminded a kind of double-dipping
scheme. He would sell a bunch of toxic
mortgages into a bond-investors' trust, which like all mortgage trusts had provisions
written into their pooling and servicing agreements (PSAs) that required the original lenders to buy the
loans back if said loans went into default.
So
Verschleiser would indeed sell these bad mortgages back to the banks, at a
discount; but instead of passing the returned money back
to the trust, per the contractual agreement, he and other Bear execs simply pocketed (stole) this returned money.
From the report in The Atlantic:
"The traders were essentially
double-dipping -- getting paid twice on the deal. Here's how: Once the security was
sold, the traders lacked a legal claim to get cash back from the bad loans because
that claim belonged to the bond investors. But these traders not only retrieved the cash,
they kept it. Thus, Bear was cheating
the investors to whom they had promised to sell a safe product -- they cheated
them out of their cash. And according to
former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Verschleiser was one of
two originators and operators of this double dipping scheme."
To better understand this, consider a
simple analogy
Imagine someone named "Bear' loaning
someone (like you) a hundred bucks to buy a bushel of apples from an apple
grower, and also making a deal (for you) with the grower, stipulating that he (the grower) has to buy back any
apples that turn out to have worms in them.
That exactly parallels what happened here: Bear Stearns, acting as
the intermediary, sold the wormy apples back
to the grower, for you, but instead
of taking the money from those returned apples and passing it back to you, per
your contract agreement with Bear, Bear simply kept the money, thereby cheating
you -- essentially stealing from you.
Just how "wormy'
were those "apples'? In one infamous
email cited in the Ambac suit, a Bear exec colorfully described the content of
the "wormy' (shitty) bonds they were
selling:
Bear deal manager Nicolas Smith wrote
an e-mail on August 11th, 2006 to Keith Lind, a Managing Director on the
trading desk, referring to a particular bond, SACO 2006-8, as "SACK OF SHIT
[2006-8]" and said, "I hope you're making a lot of money off this
trade."
Did
Verschleiser himself know the mortgages were bad? Not only did he know it, he went so far as to
tell his colleagues in writing that the
bonds were so bad that it was a waste of
money to even bother hiring or paying a company to perform due diligence on them:
"Jeff Verschleiser said in an e-mail
that he knew this was an issue. He wrote
to his peer Mike Nierenberg in March 2006, "[we] are wasting way too much
money on Due Diligence." A year
later nothing had changed. In March
2007, Verschleiser wrote to Nierenberg again about the same due diligence firm,
"[w]e are just burning money by hiring them.""
The core problem
here is that one of the ways that banks like Bear managed to convince investors
to buy these shitty bonds was by "wrapping'
them in bond insurance purchased through companies like Ambac. Investors who could be shown that the bonds
were insured were much less worried about possible default.
Yet another opportunity for theft
Verschleiser,
seeing that Bear had managed to get firms like Ambac to insure its "sack of
shit" bonds, saw here yet another crooked new opportunity to make money: He first induced companies like Ambac to
insure the worthless bonds, then he bet
against the insurers, knowing that they would eventually take a major hit,
after he set them up to do exactly that!
