Damaging Facts Revealed In JP Morgan Lawsuit

When an individual purchases an used car, the dealer who purchased the car or took it in on trade knows more about the quality of the car than the purchaser.  Consequently, consumers pay less for used cars than they otherwise would if they were fully informed about the quality of the car.  That has prompted automobile dealers, and manufacturers,  to certify the quality of some of their used car inventory.  Consumers will pay more for a certified car from a dealer and/or a manufacturer with a good reputation.

Investors purchased mortgage backed securities from banks that were "certified" for their quality by rating agencies from banks that had good reputations.  As we know the rating agencies failed in their quality control.  We are also learning that many banks misrepresented the quality of the securities that they sold to investors.  Dexia is Belgian/French bank that lost $774 million on the mortgage backed securities that it purchased from US banks.  Fannie Mae and Freddie Mac lost over $200 billion on securities that they purchased from banks.  The losses suffered by investors on mortgage backed securities provided the profits and bonuses that were enjoyed by bankers who sold those products.  The investors are trying to recoup their loses by suing the banks.  Lawyers representing Dexia have found incriminating evidence that the banks misrepresented the quality of the securities that they purchased.  Internal emails indicate JP Morgan, and banks that they purchased during the financial crisis (Washington Mutual and Bear Stearns),  overrode internal and external quality control procedures which found flaws in many of the mortgages that they packaged into securities.  They also hid that information from the rating agencies that "certified" the quality of the securities.

We are learning that many banks operated like unsavory used car dealers during the securitization mania. Most individuals who get stuck with a faulty used car don't have the financial resources to sue the dealers that sold them the junk car.  Banks like Dexia, and other investors like Fannie Mae and Freddie Mac, have the resources to recover their losses.  The potential losses to JP Morgan, and other banks who survived the financial crisis, with government help, are staggering.  These potential losses are like a black cloud over the banking industry.  It has affected their stock price and their lending practices.  Most of the banks have been working hard to build up their reserves to protect against further legal claims.