Economic Outlook: While Wall Street burned

By ANTHONY HALL, United Press International  |  Oct. 2, 2012 at 10:31 AM
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Let the public relations games begin over the lawsuit filed against JPMorgan Chase by New York state.

In one corner, state Attorney General Eric Schneiderman declined to comment on the case that contends Bear Stearns, which is now owned by JPMorgan, made numerous fraudulent securities deals in the period leading up to the 2008 financial crisis -- the crisis that served, many say, as the catalyst for the economic downturn.

The lawsuit, filed Monday, does not pivot on a specific deal, but takes issue with the failed bank's lending unit, EMC Mortgage, and its behavior from 2005 through 2007 when it allegedly was packaging securities deals with broad disregard to its clients' rights.

In effect, the bank allegedly misrepresented pools of mortgages it sold as bundled securities and when required to do so, it resold the worst of them back to the originators, keeping the money for itself, the Times reported.

Yes, that's like buying a bin of apples with the caveat that the farmer -- standing in here for the bank that wrote the loan -- buy back the rotten ones. When the farmer bought the bad apples back, Bear Stearns, which was essentially the middleman in the deal, did not return that money to investors.

JPMorgan offered a comment on the lawsuit, which sounds like the case many have anticipated for years -- the one that goes beyond human error or maybe the foibles of one or two individuals and points to pervasive human greed as the reason banks did what they did as they turned the financial system from a method of funding projects and pensions into a feeding frenzy among friends.

"We're disappointed that the New York [attorney general] decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record -- instead relying on recycled claims already made by private plaintiffs," said Joseph Evangelisti, the bank's spokesman.

Evangelisti also distanced JPMorgan from the allegations, saying they concern a period before JPMorgan bought Bear Stearns in a March 2008 fire sale.

While the case needs to proceed according to its particularities, some of the broader implications are already in the bag. The Dodd-Frank financial overhaul bill was signed into law more than a year ago after at least a year of divisive debate in Washington.

Some rules have yet to be written, however, so the sentiments stirred up by a broad accusation against what was at the time the fifth-largest investment bank in the country could still influence how regulators move forward.

In a broad sense, the case could also influence the federal budget debate. Bankers for years contended they were just as surprised as anyone at the financial system collapse. Their proof is that everyone was hurt in the ensuing mess, including bankers, and that very intelligent people were making dumb bets right up to the last minute. If bright people missed the early signs of a collapse, how could it really be their fault?

This case may precisely answer that question exactly: They didn't miss it, they played it. And that could undermine the argument the obscene wealth that remained ensconced within an elite battery of bankers -- those that fiddled, while Rome burned -- belongs there. It could change the argument on taxes, in other words, by pointing out that the idea of redistributing wealth with higher taxes for the rich is an argument that can be made without apology.

In international markets Tuesday, the Nikkei 225 index in Japan lost 0.12 percent while the Shanghai composite index in China added 1.45 percent. The Hang Seng index in Hong Kong gained 0.38 percent while the Sensex in India rose 0.33 percent.

The S&P/ASX 200 in Australia added 1.01 percent.

In midday trading in Europe, the FTSE 100 index in Britain rose 0.33 percent while the DAX 30 in Germany climbed 0.42 percent. The CAC 40 in France rose 0.31 percent while the Stoxx Europe 600 rose 0.29 percent.

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