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Wall Street's Dirtiest Deals Show Why Our Economy Fell Apart

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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

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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 sh*t [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.""

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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 sh*t" 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!  

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)

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