20. Extra! Extra!

JPMorgan Unit Is Sued Over Mortgage Pools

Wow! (but no jail: these are civil suits)

Here is what happened. In 2005-7 the investment bank Bear Stearns sold mortgage-backed securities to investors. The accusation is that "The firms made material misrepresentations about the quality of the loans in the securities [...] and ignored evidence of broad defects among the loans that they pooled and sold to investors".

Another accusation is that they double dipped:  Suit says Bear Stearns double dipped with mortgage bonds . 

Here is how it worked:

1. A loan originator (a bank) would give mortgage to a borrower.

2. Bear Stearns would buy many such mortgages from loan originators, package them into securities and sell them to investors.

3. The purchase contract between Bear Stearns and the loan originator included a clause that, if a mortgage was defaulted within a short time after Bear Stearns bought it, the loan originator would compensate Bearn Stearns for losses.

This makes sense since the loan originator knew the borrower, Bear Stearns did not.

4. And so they did. Bearn Stearns received substantial amounts of compensation. It did not pass it on to investors. They are now suing.

Apparently this was a fairly common practice

Here it is in more familiar terms:

- you buy, say, electronic parts. The sellers promise to pay you a fine if they are defective.

- you sell a box of parts, claiming they are in perfect order.

- the sellers let you know that the parts were, in fact, defective and pay fines.

-  you do not pass on the money to the buyer of the box of parts, but keep them.

So the buyer of box of parts pays you for good parts, and the seller of the parts pays you because they are defective. Your company makes a profit and you get a bonus, and buy yourself a car, much, much better than the one in the familiar song...

Nice deal if you can get it and get away with it.