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Finally, someone goes after mortgage fraud

There’s nothing new in the blockbuster mortgage fraud case New York’s attorney general filed against JPMorgan Chase last week. But despite being stale, it still counts as a bold, meaningful response to the financial crisis, because it’s more than anyone in Washington has been able to muster.

New York is just now going after JPMorgan for the housing bubble excesses of Bear Stearns, the investment bank that JPMorgan absorbed as the economy imploded four years ago. New York's lawsuit alleges that Bear committed "systemic fraud on thousands of investors." It claims JPMorgan bought Bear's crimes along with the bank itself. But the meat of New York's lawsuit — the bleak mortgage data, the gratuitously expletive-laden internal bank e-mails, and the sordid tales of a bank fleecing its own customers — has been public for years.

New York's Bear Stearns case is the first to come out of the joint state-federal working group announced during President Obama's January State of the Union Address. And it's the perfect encapsulation of government's response to the four-year-old financial crisis.

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The suit that New York Attorney General Eric Schneiderman unveiled last week accuses Bear of selling billions of dollars in bonds backed by mortgages it knew to be "fundamentally defective." Bear trafficked in lucrative subprime mortgages, in mortgages with exotic payment provisions, and in liar loans, mortgages that didn't require the bank to verify borrowers' incomes. Bear made huge piles of money packaging these mortgages into bonds and selling them to investors, so the bank cut several corners to keep the train going.

Bear discouraged its mortgage lenders from writing conventional loans, which made banks less money than costlier ones. It turned a blind eye to bad loans, knowingly selling investors mortgages that were either already in default, or well on their way. As the cost of keeping its Wall Street bond machine running, Bear pushed loans on borrowers who were unlikely to repay their mortgages. And it grossly overstated the quality of its mortgage bonds in investor forms filed with the Securities and Exchange Commission.

These shortcuts blew up on Bear's customers. Schneiderman's office looked at 103 bubble-era Bear deals, which have now lost $22.5 billion, or a quarter of their original value; another $12.9 billion worth of mortgages are either in foreclosure or heading that way. Fannie Mae and Freddie Mac invested heavily with Bear; 60 percent of the deals Fannie and Freddie bought into saw one in two mortgages default.

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New York's lawsuit describes a bank where the need to keep the business flowing trumped any concern about selling bad loans. Such pervasive greed gripped all of Wall Street during the housing bubble, eventually toppling the country's economy. It wasn't confined to Bear. The federal Financial Crisis Inquiry Commission said so in January 2011. The dynamic was described in vivid testimony earlier than that. It was no secret. There's nothing in Schneiderman's lawsuit that can't be found in the FCIC's report, or in the bipartisan report from the Senate Permanent Subcommittee on Investigations, or in the raft of lawsuits filed by insurance companies, pension funds, hedge funds, and quasi-government agencies finding themselves on the losing end of the banks' housing deals. JPMorgan brushed off Schneiderman's suit as a bunch of "recycled claims," because that's what they are. And there could be more coming — reports have Schneiderman weighing lawsuits against a dozen other financial institutions.

Give Schneiderman credit for picking housing bubble outrages out of the recycling bin and running with them. That's more than regulators in Washington have been willing to do. The FCIC, the Senate subcommittee report, and the private housing bust lawsuits have given Washington a wealth of material with which to pursue Wall Street, but the feds have declined to run with it. Fannie Mae and Freddie Mac, the government-owned mortgage companies, are suing 17 banks, but as investors. At the same time New York was readying its Bear lawsuit, the SEC was walking away from suing Goldman Sachs over a crooked-looking subprime deal. And even though New York's lawsuit is the result of a joint state-federal task force, it's jarring that the task force had to take action at the state level, not nationwide. Foreclosures and predatory lending harmed homeowners and mortgage investors nationwide. Something's wrong when Albany has more sway over a bad mortgage in California than the SEC and Department of Justice do.

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Paul McMorrow is an associate editor at CommonWealth Magazine. His column appears regularly in the Globe.