The $9 Billion Witness: Meet JPMorgan Chase's Worst Nightmare


She tried to stay quiet, she really did. But after eight years of keeping a heavy secret, the day came when Alayne Fleischmann couldn't take it anymore. "It was like watching an old lady get mugged on the street," she says. "I thought, 'I can't sit by any longer.'" Fleischmann is a tall, thin, quick-witted securities lawyer in her late thirties, with long blond hair, pale-blue eyes and an infectious sense of humor that has survived some very tough times. She's had to struggle to find work despite some striking skills and qualifications, a common symptom of a not-so-common condition called being a whistle-blower. Fleischmann is the central witness in one of the biggest cases of white-collar crime in American history, possessing secrets that JPMorgan Chase CEO Jamie Dimon late last year paid $9 billion (not $13 billion as regularly reported – more on that later) to keep the public from hearing.

Back in 2006, as a deal manager at the gigantic bank, Fleischmann first witnessed, then tried to stop, what she describes as "massive criminal securities fraud" in the bank's mortgage operations.

Thanks to a confidentiality agreement, she's kept her mouth shut since then. "My closest family and friends don't know what I've been living with," she says. "Even my brother will only find out for the first time when he sees this interview." 

Six years after the crisis that cratered the global economy, it's not exactly news that the country's biggest banks stole on a grand scale. That's why the more important part of Fleischmann's story is in the pains Chase and the Justice Department took to silence her.

She was blocked at every turn: by asleep-on-the-job regulators like the Securities and Exchange Commission, by a court system that allowed Chase to use its billions to bury her evidence, and, finally, by officials like outgoing Attorney General Eric Holder, the chief architect of the crazily elaborate government policy of surrender, secrecy and cover-up. "Every time I had a chance to talk, something always got in the way," Fleischmann says.

This past year she watched as Holder's Justice Department struck a series of historic settlement deals with Chase, Citigroup and Bank of America. The root bargain in these deals was cash for secrecy. The banks paid big fines, without trials or even judges – only secret negotiations that typically ended with the public shown nothing but vague, quasi-official papers called "statements of facts," which were conveniently devoid of anything like actual facts. 

Jamie Dimon
Jamie Dimon (Photo: Bloomberg/Getty)

And now, with Holder about to leave office and his Justice Department reportedly wrapping up its final settlements, the state is effectively putting the finishing touches on what will amount to a sweeping, industrywide effort to bury the facts of a whole generation of Wall Street corruption. "I could be sued into bankruptcy," she says. "I could lose my license to practice law. I could lose everything. But if we don't start speaking up, then this really is all we're going to get: the biggest financial cover-up in history." 

Alayne Fleischmann grew up in Terrace, British Columbia, a snowbound valley town just a brisk 18-hour drive north of Vancouver. She excelled at school from a young age, making her way to Cornell Law School and then to Wall Street. Her decision to go into finance surprised those closest to her, as she had always had more idealistic ambitions. "I helped lead a group that wrote briefs to the Human Rights Chamber for those affected by ethnic cleansing in Bosnia-Herzegovina," she says. "My whole life prior to moving into securities law was human rights work."

But she had student loans to pay off, and so when Wall Street came knocking, that was that. But it wasn't like she was dragged into high finance kicking and screaming. She found she had a genuine passion for securities law and felt strongly she was doing a good thing. "There was nothing shady about the field back then," she says. "It was very respectable."

In 2006, after a few years at a white-shoe law firm, Fleischmann ended up at Chase. The mortgage market was white-hot. Banks like Chase, Bank of America and Citigroup were furiously buying up huge pools of home loans and repackaging them as mortgage securities. Like soybeans in processed food, these synthesized financial products wound up in everything, whether you knew it or not: your state's pension fund, another state's workers' compensation fund, maybe even the portfolio of the insurance company you were counting on to support your family if you got hit by a bus.

As a transaction manager, Fleischmann functioned as a kind of quality-control officer. Her main job was to help make sure the bank didn't buy spoiled merchandise before it got tossed into the meat grinder and sold out the other end.

A few months into her tenure, Fleischmann would later testify in a DOJ deposition, the bank hired a new manager for diligence, the group in charge of reviewing and clearing loans. Fleischmann quickly ran into a problem with this manager, technically one of her superiors. She says he told her and other employees to stop sending him e-mails. The department, it seemed, was wary of putting anything in writing when it came to its mortgage deals.

"If you sent him an e-mail, he would actually come out and yell at you," she recalls. "The whole point of having a compliance and diligence group is to have policies that are set out clearly in writing. So to have exactly the opposite of that – that was very worrisome." One former high-ranking federal prosecutor said that if he were taking a criminal case to trial, the information about this e-mail policy would be crucial. "I would begin and end my opening statement with that," he says. "It shows these people knew what they were doing and were trying not to get caught."

In late 2006, not long after the "no e-mail" policy was implemented, Fleischmann and her group were asked to evaluate a packet of home loans from a mortgage originator called GreenPoint that was collectively worth about $900 million. Almost immediately, Fleischmann and some of the diligence managers who worked alongside her began to notice serious problems with this particular package of loans.

For one thing, the dates on many of them were suspiciously old. Normally, banks tried to turn loans into securities at warp speed. The idea was to go from a homeowner signing on the dotted line to an investor buying that loan in a pool of securities within two to three months. Thus it was a huge red flag to see Chase buying loans that were already seven or eight months old.

"I could lose everything. But if we don't start speaking up, we're going to get the biggest financial cover-up in history." 

What this meant was that many of the loans in the GreenPoint deal had either been previously rejected by Chase or another bank, or were what are known as "early payment defaults." EPDs are loans that have already been sold to another bank and have been returned after the borrowers missed multiple payments. That's why the dates on them were so old.

In other words, this was the very bottom of the mortgage barrel. They were like used cars that had been towed back to the lot after throwing a rod. The industry had its own term for this sort of loan product: scratch and dent. As Chase later admitted, it not only ended up reselling hundreds of millions of dollars worth of those crappy loans to investors, it also sold them in a mortgage pool marketed as being above subprime, a type of loan called "Alt-A." Putting scratch-and-dent loans in an Alt-A security is a little like putting a fresh coat of paint on a bunch of junkyard wrecks and selling them as new cars. "Everything that I thought was bad at the time," Fleischmann says, "turned out to be a million times worse." (Chase declined to comment for this article.)

When Fleischmann and her team reviewed random samples of the loans, they found that around 40 percent of them were based on overstated incomes – an astronomically high defect rate for any pool of mortgages; Chase's normal tolerance for error was five percent. One mortgage in particular that sticks out in Fleischmann's mind involved a manicurist who claimed to have an annual income of $117,000. Fleischmann figured that even working seven days a week, this woman would have needed to work 488 days a year to make that much. "And that's with no overhead," Fleischmann says. "It wasn't possible."

But when she and others raised objections to the toxic loans, something odd started happening. The number-crunchers who had been complaining about the loans suddenly began changing their reports. The process she describes is strikingly similar to the way police obtain false confessions: The interrogator verbally abuses the target until he starts producing the desired answers. "What happened," Fleischmann says, "is the head diligence manager started yelling at his team, berating them, making them do reports over and over, keeping them late at night." Then the loans started clearing.

As late as December 11th, 2006, diligence managers had marked a full 33 percent of one loan sample as "stated income unreasonable for profession," meaning that it was nearly inevitable that there would be a high number of defaults. Several high-ranking executives were copied on this report.

Then, on December 15th, a Chase sales executive held a lengthy meeting with reps from GreenPoint and the diligence team to examine the remaining loans in the pool. When they got to the manicurist, Fleischmann remembers, one of the diligence guys finally caved under the pressure from the sales executive. "He had his hands up and just said, 'OK,' and he cleared it," says Fleischmann, adding that he was shaking his head "no" even as he was saying yes. Soon afterward, the error rate in the pool had magically dropped below 10 percent – a threshold that itself had just been doubled to clear the way for this deal.

After that meeting, Fleischmann testified, she approached a managing director named Greg Boester and pleaded with him to reconsider. She says she told Boester that the bank could not sell the high-risk loans as low-risk securities without committing fraud. "You can't securitize these loans without special disclosure about what's wrong with them," Fleischmann told him, "and if you make that disclosure, no one will buy them."


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commented 2014-11-07 10:11:45 -0500 · Flag
Harald writes:

Core problem, frequency and behavior endogenous to the operating of “big money” does not surprise (me) anymore. Shocking and disastrous it is, though.

That! system is crooked. Window dressing, own agendas, nepotism, pretence. And if and when fined, they personally are not convicted and the fine is usable as tax reduction. It reeks.

Government and its people have to become independent from the banking weasels, bandits and “bonus”-billionaires. Holder, much like Obama, is a servant to and accomplice of big money, and a muppet on top of it. Most people in power are. That’s, why they come to power.

Politics and common sense need to be freed from the chains of (that! type of) “capitalism” (not only the Wall Street or City of London Boys). Alas, this only is possible, if the states did not amount ever more debt. And with the securities buying program of the EZB lined up, we have yet another example of “tricky” balance sheet extension. Too big to fail – merely stuff the explosives into some below-the-line position or shadow bank. And Jamie (Dimon) (not Bob) is your uncle. Everything honky-dory. It sucks. Big time. And one need not be a left-wing to judge like that.
commented 2014-11-07 09:40:40 -0500 · Flag
Miriam writes:

This is shocking to me. I had really no idea that the rot was so deep in the system. I have no faith in the financial industry people to be professional and ethical and I have no faith in the regulators. Disgusting.
commented 2014-11-07 09:34:47 -0500 · Flag
Delroi writes:

@jc: If existing laws were observed/applied, if the constitution were adhered to, the vast majority of the modern-era sewage to which we’ve been exposed would have been properly flushed. The framers knew men left to their own devices opt for rule of men, not rule of law, that’s why they set up the frameworks they did, and that’s why, although mortal and flawed, they were in the main, brilliant.
commented 2014-11-07 09:24:49 -0500 · Flag
J.C. writes:

@ Delroi: fair enough, i agree w that but never about the notion that somehow men toed the line w their better angels in the “good ole days”
look you & I know there are enough laws on the books to have prosecuted & convicted many of these, & lets call a spade a spade here, felons
but … Qui bono? the answer, frankly, no one, save society at large & what step & fetch-it bureaucrat has an incentive to do that?
especially when he/she has witnessed what happens w those w the temerity to use whistle-blower laws? they are never seen or heard again
commented 2014-11-07 07:11:16 -0500 · Flag
Paul D. writes:

Wow. What an article. I enjoyed it very much.
commented 2014-11-07 07:00:54 -0500 · Flag
Delroi writes:

Difference: in the past (glass-steagal) era, it was still possible to fuck up badly enough that one was exposed to the consequences of one’s malfeasance and fraud — bankreuptcy. No longer. You work for one of the finance para-statal agencires, you can financially sodomize the populace daily, and garner a larger bonus. And a government sinecure when you’re ready to commit to ‘public service’.
commented 2014-11-07 06:59:49 -0500 · Flag
J.C. writes:

many (most) of these corners were never honest…
let us look at one egregious example, the ratings agencies
they are funded by the very same banks whose paper they rate
it has always been so, very cozy, very arms length…until the shit hit the fan in 2008
& a bright light was shone on this musty corner of the capital markets
& then the world was shocked, shocked that there was lax vigilance
commented 2014-11-07 06:58:34 -0500 · Flag
Delroi writes:

No different than the SEC investigator who was fired for the temerity of documenting serial fraud at goldman sachs.

We have lost our constitutional republic. All regulators are captive enablers. This will end in flames. There isn’t a corner of the capital markets that’s honest any longer.
commented 2014-11-07 06:56:43 -0500 · Flag
A.R. writes:

Taibbi is a hell of a reporter…