JPMorgan Chase CEO Jamie Dimon has tried his best to suggest that the financial crisis was someone else's fault. But a batch of court documents released this week undermine this claim, indicating that the bank knew the mortgage investments it sold were seriously flawed.
According to the documents, which include emails and transcripts of employee interviews filed in an investor lawsuit, JPMorgan hired independent analysts to review the quality of the home loans it was packaging for sale prior to the collapse of the housing market. That review found that 20 to 80 percent of the mortgages did not meet underwriting standards, Bloomberg reports. These documents show that JPMorgan bundled these mortgages into complex securities anyway and then sold them to investors without disclosing their problems, according to Bloomberg and the New York Times.
Flaws identified by the reviews included loans made to overstretched borrowers, missing documentation and fraudulent home appraisals, according to Bloomberg and the NYT. The court documents make clear that JPMorgan employees were well aware of these flaws and even exchanged emails about them. For example, after a review finding that at least 1,154 mortgages were delinquent, JPMorgan told investors that only 25 loans were delinquent, according to court documents reviewed by the NYT.
These allegations echo those that have plagued other Wall Street banks, including Goldman Sachs. In the lead-up to the financial crisis, Goldman sold mortgage-backed securities while secretly betting that the housing market would crash, according to news reports and a lawsuit from the Securities and Exchange Commission. Goldman and the SEC settled the charges in 2010.
Dimon has tried to differentiate JPMorgan from the rest of Wall Street. In a recent appearance, he lambasted "big dumb banks" that "virtually brought the country down to its knees," according to American Banker. JPMorgan, which recently surpassed Wells Fargo as the country's most valuable bank, has maintained a relatively good reputation, at least by Wall Street standards. It bought Washington Mutual and Bear Stearns at the government's urging in 2008, a sign that it was in stronger shape than other banks and willing to help the country, albeit with government support.
But JPMorgan's reputation recently has taken a hit. The bank lost more than $6 billion on one set of trades in the "London Whale" scandal, which Dimon first revealed last year. Its stock price tumbled after the announcement but has since recovered. In October, New York Attorney General Eric Schneiderman also sued the bank, alleging that it "kept investors in the dark" about the quality of the mortgage bonds it sold.