Everything You Need to Know About Wall Street, in One Brief Tale

POSTED: January 13, 9:15 AM ET

Read more: http://www.rollingstone.com/politics/blogs/taibblog/everything-you-need-to-know-about-wall-street-in-one-brief-tale-20120113#ixzz1knUnt9e4


If there was ever a news story that crystalized the moral dementia of modern Wall Street in one little vignette, this is it.

Newspapers in Colorado today are reporting that the elegant Hotel Jerome in Aspen, Colorado, will be closed to the public from today through Monday at noon.

Why? Because a local squire has apparently decided to rent out all 94 rooms of the hotel for three-plus days for his daughter’s Bat Mitzvah.

The hotel’s general manager, Tony DiLucia, would say only that the party was being thrown by a "nice family," but newspapers are now reporting that the Daddy of the lucky little gal is one Jeffrey Verschleiser, currently an executive with Goldman, Sachs.

At first, I couldn't remember how I knew that name. But then I looked it up and saw an explosive Atlantic magazine story, published last year, called, "E-mails Suggest Bear Stearns Cheated Clients Out Of Millions." And then I remembered that piece, and it hit me: Jeffrey Verschleiser is one of the biggest assholes in the entire world!

The story begins at Bear Stearns, where Verschleiser used to work, up until the company exploded, in large part because of him personally.

Back in the day, you see, Verschleiser headed Bear’s mortgage-backed securities operations. Toward the end of his tenure, his particular specialty began with what at the time was the usual industry-wide practice, putting together gigantic packages of crappy subprime mortgages and dumping them on unsuspecting clients.

But Verschleiser reportedly went beyond that. According to a lawsuit later filed by a bond insurer called Ambac, Verschleiser also masterminded a kind of double-dipping scheme. What he would do is sell a bunch of toxic mortgages into a trust, which like all mortgage trusts had provisions written into their pooling and servicing agreements (PSAs) that required the original lenders to buy the loans back if they went into default.

So Verschleiser would sell bad mortgages back to the banks at a discount, but instead of passing the money back to the trust, he and other Bear execs allegedly pocketed the funds.

From the Atlantic story by reporter Teri Buhl:

The traders were essentially double-dipping -- getting paid twice on the deal. How was this possible? Once the security was sold, they didn't have a legal claim to get cash back from the bad loans -- that claim belonged to bond investors -- but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme.

Imagine giving someone a hundred bucks to buy a bushel of apples, but making a deal with him that he has to buy back any apples that turn out to have worms in them. That's what happened here: Bear sold the wormy apples back to the farmer, but instead of taking the money from those sales and passing it on to you, they simply kept the money, according to the suit.

How wormy were those apples? In one infamous email cited in the suit, a Bear exec colorfully described the content of the bonds they were selling:

Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to Keith Lind, a Managing Director on the trading desk, referring to a particular bond, SACO 2006-8, as "SACK OF SHIT (2006-)8" and said, "I hope your making a lot of money off this trade."

So did Verschleiser himself know the mortgages were bad? Not only did he know it, he went so far as to tell his colleagues in writing that it was a waste of money to even bother performing due diligence on the bad bonds:

Jeffrey Verschleiser even said in an e-mail that he knew this was an issue. He wrote to his peer Mike Nierenberg in March 2006, "(we) are wasting way too much money on Bad Due Diligence." Yet a year later nothing had changed. In March 2007, Verschleiser wrote to Nierenberg again about the same due diligence firm, "[w]e are just burning money hiring them."

One of the ways that banks like Bear managed to convince investors to buy these bonds was by wrapping them in bond insurance through companies like Ambac, commonly known as “monoline” insurers. Investors who knew the bonds were insured were less worried about default.

Verschleiser, seeing that Bear had gotten firms like Ambac to insure its “sack of shit” bonds, saw here a new opportunity to make money. He first induced the monolines to insure the worthless bonds, then bet against the insurers! (Is it any wonder this guy ended up hired by Goldman, Sachs?) From the Atlantic story again:

Then in November 2007, Verschleiser wrote to his risk committee that he knew insurers for mortgage securities were going to have big financial problems. He suggested they multiply by ten times the short bet he'd just made against stocks like Ambac. These e-mails show Verschleiser's trading desk bragging to firm leadership that he made $55 million off shorting insurers' stock in just three weeks.

So in essence, Verschleiser was triple-dipping. First he was selling worthless “sacks of shit” to investors, representing them as good investments. Then, he kept the money from the return sales of the wormy apples. And then, on top of that, he made money by betting against the insurers he was sticking with these toxic assets.

We all know what happened from there. Bear, Stearns went under, thanks in large part to insane schemes like Verschleiser’s, and all of us were forced to pick up at least part of the tab as the Fed spent billions subsidizing Bear’s emergency takeover by JP Morgan Chase. In subsequent litigation, Chase has steadfastly refused to buy back the bad mortgages dumped on investors by the likes of Verschleiser, and has even fought tooth and nail to prevent the information in the Ambac suit from being made public.

Ambac went into Chapter 11 bankruptcy in 2010 for a variety of reasons, some of which had nothing to do with its losses in deals like these. But certainly Ambac and other monoline insurers like MBIA suffered for having insured worthless mortgage bonds sold onto the market by the Verschleisers of the world. Ambac in its suit asserted that it paid out over $641 million in claims related to the bonds from the Bear deals.

With all of this, though, Verschleiser landed happily on his feet. He reportedly heads Goldman’s mortgage division now. And after cutting a mile-wide swath of losses through the American economy, helping destroy two venerable firms in Bear and Ambac, bilking the taxpayer for untold millions more (he is also named in a lawsuit filed by the Federal Housing Finance Agency for allegedly speeding bad loans onto securitization before they defaulted), Verschleiser is now living the contented life of a proud family man, renting out a 94-room hotel for three days for his daughter’s Bat Mitzvah.

It’s certainly heartening that Verschleiser is spending this money on his daughter instead of, say, hiring a busload of Jamaican hookers to spend the weekend lounging with him in a hot tub full of Beluga caviar. People ought to give their children the best, I guess. But there’s this, too: at a time when one in four Americans has zero or negative net worth, renting a 94-room hotel for three days for a tweenager party might already be pushing the edge of the good taste/tact envelope. Even for the most honest millionaire in Aspen, it would seem a little gauche.

But for this burglarizing dickhead to do it? It’s breathtaking. I hope he at least invited his bankrupted investors to the pool party.

p.s. Since this blog was posted, I've received a number of letters all asking the same question -- how could it be possible that what Verschleiser did is not illegal? How is he not in jail?

The answer is that if the allegations in the Ambac suit are true, it certainly would seem to be illegal. Most notably, the pocketing of putback money almost has to be a form of theft or embezzlement.

The rest of Bear/Verschleiser's scheme, however, is also illegal, but in a more complicated way. If you read the complaint in the Ambac suit, what you see is a sort of extreme blueprint for how mortgage securitization worked in general during that period.

There is a veritable sea of fraudulent and corrupt practices one may gaze upon here, if the SEC were looking for something to target -- everything from withholding material facts from customers and ratings agencies, to threatening ratings agencies with lost business if they didn't overrate bonds, to lying in offering documents, to the manipulation of accounting procedures (this went on after the loans had moved onto Chase's books), etc. -- but the most flagrant violation in the suit involves the issue of due diligence, and here we do know a lot about Verschleiser's role.

It seems that when Bear did do due diligence in these deals, it very frequently overrode the firms they'd hired to do that due diligence, and put the loans in the deals anyway. In the third quarter of 2006, Bear overrode its due diligence firm an incredible 65% of the time, putting loans into their securitizations despite an outside firm finding red flags in the notes.

Even worse, Bear went out of its way to hide the evidence that it was knowingly ignoring due diligence. This is from the complaint:

Bear Stearns ignored the proposals made by the heads of its due diligence department in May 2005 to track the override decisions, and instead took the opposite tack, adopting an internal policy that directed its due diligence managers to delete the communications with its due diligence firms leading to its final loan purchase decisions, thereby eliminating the audit trail.

This is fraud because in its agreements with investors, Bear promised to conduct "due diligence," it promised to conduct "quality control" testing of the loan pools, it promised to "repurchase" defective loans, and it also promised to implement "seller monitoring," i.e. to prevent the securitization of loans from bad suppliers.

But it not only didn't do these things, it engaged the opposite behavior and knowingly covered up its fraud by deleting its communications.

Verschleiser was personally named in the evidence offered in the Ambac suit. In a letter to Ambac, Bear's RMBS Investor Relations managing director Cheryl Glory wrote that "Jeff will... provide you with the due diligence results of all three deals once complete."

But this is the same Jeff who we now have in writing saying this about those promised due diligence results: "We are wasting way too much money on Bad Due Diligence," and "We're just burning money hiring them."

It doesn't take a genius to deduce that Bear was not upholding its contractual obligations by delivering what it itself considered "bad due diligence" to Ambac. At the very least, this is actionable.

Verschleiser undermined due diligence in other ways. One good one was to demand that his due diligence people operate at speeds that made genuine due diligence impossible.

At one point during these deals, Verschleiser reamed out his immediate subordinate, co-head of mortgage finance Baron Silverstein, over the "problem" of the due diligence department taking too much time to do its work. Silverstein responded by issuing the following tirade to John Mongelluzzo, Bear's VP for Due Diligence, demanding that he not get in the way of Bear's insane goal of funding 500 mortgages a day:

I refuse to receive more emails from (Verchleiser) (or anyone else) questioning why we’re not funding loans every day. I’m holding each of you responsible for making sure we fund at least 500 each and every day… I was not happy when I saw the funding numbers and I knew NY would NOT BE HAPPY... I expect to see 500+ every day. I will do whatever is necessary to make sure you’re successful in meeting this objective.

Whenever any right-wing loon, or Bloombergite, tries to tell you the mortgage crisis was caused by the government forcing the poor banks to lend to broke black people, please direct them to this passage. The banks not only wanted to give out these loans, they wanted to give them out at the speed of light. They wanted to crank them out so fast that their own auditors literally couldn't read the writing on the loan applications. This was greed, not policy. Anybody who says anything else is high on something.

Anyway, given that much of Verschleiser's questionable behavior is in writing, his case sure seems court-ready. But for whatever reason, he has not been indicted.

One can almost understand a regulator not wanting to take on the whole circular securitization scheme -- Bear lends money to corrupt mortgage firm, mortgage firm makes bad loans, Bear packages bad loans and sells to investors, then takes the proceeds and creates more bad loans -- because it is so complex and difficult to prove.

But in this case there are simple issues of fraud and theft thatcould be taken on without having to prosecute broader crimes related to securitization. But prosecutors, apparently, just blew those off. In the current environment, regulators even miss the layups.

Now Main Street Knows how Bear’s Jeff Verschleiser made Millions off Cheating Others
Posted by Teri Buhl under Bank Fraud
LINK

One of the central bad actors in my reporting on the alleged fraud machine Bear Stearns mortgage department was running made headlines this weekend for spending an absurd amount of greenbacks to promote his daughter’s coming of age. Jeff Verschleiser, age 43, and his wife Amy, age 41, went and bought out a popular Aspen hotel during a special local weekend celebration called Winterskol and now have a lot of people offended. Media reports estimated the Jewish family is spending between $500k to $1 million for the four-day weekend + Bat Mitzvah party. Now spending tons of money to throw a religious celebration for your teen isn’t anything new for the New York Jewish set but Matt Taibbi of Rolling Stone picked up on the notion Jeffery didn’t exactly make the dollars he’s spending this weekend honestly.

The daughter’s name is Madison Rose Verschleiser and when she’s not buzzing around the Aspen slopes entering ski races or hanging in her parents huge 2nd home at Aspen’s Stillwater Ranch area, she lives in her parents mega million Central Park-view apartment on 5th Avenue. Aspen Daily News reporters told me they saw Madison’s parents had three big LCD’s placed in the hotel lobby with their daughters face in a circle jerk of photos running repeatedly on the screens – you know because its ‘All about Madison this weekend’. I found a website, madisonaspen2012.com, created in honor of Madison’s big weekend but it looks like the family took it down after news broke on their spending habits. (Of course a google cache of the website still works.)

Readers of mine know the story about Verschleiser and his Bear Stearns trader buddy Mike Nierenberg allegedly stealing billions from their own clients during the housing boom by packaging and selling totally dysfunctional mortgage securities that helped bring down the bank. But now with Taibbi revisiting about a years’ worth of my reporting on the Bear traders’ apparent securities fraud Verschleiser is officially labeled one of Wall Street’s biggest pricks.

Taibbi Wrote:

At first, I couldn’t remember how I knew that name. But then I looked it up and saw an explosive Atlantic magazine story, published last year, called, “E-mails Suggest Bear Stearns Cheated Clients Out Of Millions.” And then I remembered that piece, and it hit me: Jeffrey Verschleiser is one of the biggest assholes in the entire world!

In one of the latest civil fraud complaints against Bear Stearns, and their owner JP Morgan, about 30 whistleblowers came forward to explain Jeff and his fellow traders were known as ‘Bear Don’t Care’ for telling third-party due diligence firms to just ignore all the mortgage loans in the billions of securities they were selling when they put their stamp of approval on the deal. A stamp that got plenty of pension funds to buy their ‘sack of shits’. It’s this ‘Don’t Care’ attitude that seems to have upset a lot of people this weekend as the pitchforks and frustrated anger rang loud and clear in the comment section of every story written on Jeff’s daughter party (there are about 9 of them). The New York Post even got one Aspen weekender to call it “a disgusting display of ill-gotten gains.”

Because of the need for the Verschleisers to have a private event in a public place, the locals can’t use their favorite watering hole at Hotel Jerome, called the J Bar, and spend their hard-earned dollars watching the Broncos make a run at the NFL playoffs because Jeffrey is all about exclusivity. It’s unclear if the Verschleisers plan to compensate the bar staff for all the lost tips this weekend – locals tell me some bartenders can make up to $1k a night on a big weekend like this. The editor of the Aspen Daily News, Carolyn Sackariason, broke more news last night reporting Verschleiser spent about $7,000 to kick out anyone wanting to use the city-owned Aspen Family Rec Center tonight so his daughter Madison and her friends can privately run around in it.

As the world is soaking in what a douchebag Jeff Verschleiser is I’m wondering how his wife feels spending the millions he made off the backs of pension funds and the rest of Bear Stearns employees who lost sooo much money when the firm failed and their stock was sold for only few bucks. Taibbi writes that Jeff’s actions helped bring down the firm but for quite a few years he was actually the gold money maker for the bank with his hand in every part of the fee earning process a mortgage security could go through (the Ambac suit points out he just didn’t do it ethically or legally). It wasn’t until mid 2007 when he pigged out buying failed subprime lender Encore, that the bank got stuck with millions of very sick wholesale mortgage loans. Loans that sucked the life out the banks regulatory capital and eventually were a part of what led to a liquidity problem. Jeff’s wife Amy, a former private school teacher and Dalton 88’ grad, happens to be on a bunch of Jewish charity boards (such as the NYC United Jewish Association) and I wonder if the charity work (aka party planning) is to clear her conscious. It’s not like she can’t read the actions of her husband that are laid out in multiple civil fraud suits citing his own emails. Given she was also a Madoff investor who lost a few bucks, you’d hope there is some twinge of pain in seeing the rest of world want to throw up over their family’s obnoxious display of wealth this weekend.

Amy appears to have grown up in an influential upper east side jewish family. Her Aunt, Elaine Turner Cooper, was a huge patron of the Whitney Museum and her 1st cousin Steven Mnuchin is now the ex-Goldman guy who runs the carcass of failed IndyMac. (It might make sense that Mnuchin helped Jeffrey get the Goldman job when JP Morgan threw him out after the Bear take over.) During her husband’s boom earning years, 2006, online real estate records show the family moved out of a upper east side duplex they bought for $10 million on Park Ave and upgraded to a full floor Central Park apartment on 5th Avenue that has only 15 apartments in the building selling for at least $16 million (They live on the third floor of 944 5th Ave, New York, NY). Property records show they also spent $16.5 million for a new custom-built 5-bedroom Aspen home at 61 Stillwater Lane in the fall of 2006. This is the same time period billions of Bear mortgage securities were created by Jeff – securities that the Netherland’s largest state pension fund just sued Mr. Verschleiser individually for his role in fraudulent inducement and multiple violations of securities laws. The suit was filed on December 7th in New York State court.

Taibbi added an update to his story with a rant on why Verschleiser hasn’t been indicted yet for allegedly stealing billions from his own clients. But the colorful Rolling Stone writer must have failed to read my story this summer about NY Assemblyman Morelle pushing his friend the NY Attorney General to start a criminal investigation into the Bear mortgage team. The AG has asked civil attorneys suing Bear/JPM to share evidence with him and I’ve spoken with people his team has interviewed- they all say he’s serious about using the Martin Act against these bad boys. Given those facts, I’m not agreeing with Taibbi’s view these guys will never get charged although it will take some political balls to get it done.

So with the NY Attorney General having a keen eye on charging Jeffrey and his fellow mortgage traders for criminal acts, a federal housing regulator gunning for him individually in their mega-billion fraud suit, and locals in Aspen pissed off by his personal exclusivity needs; do you think the Hotel Jerome manager is looking a little foolish for telling the Aspen Times a ‘nice family’ had taken over the hotel?

UPDATE 1.16.12: It appears the Verschleiser had a like-minded friend write in to the Aspen Daily News about their weekend news story ‘Renter of Jerome Under Scrutiny for Wall Street Deals’ calling the coverage mean and nasty. His logic was Jeff’s civil fraud suits are old news and he couldn’t understand why the local paper would print news about the background of a part-time resident that had just made national news. Really? First off Jeff’s civil fraud cases are ongoing news and the subject of upcoming trials and just a few weeks ago he was sued again, as a named defendant, for fraud and securities violations. Second, it’s the local papers job to tell the reader who this colorful character is considering his actions, taking over public places for the private use of friends, effected their weekend. Third, it’s actually not the papers job to promote tourism for Aspen nor should they worry about how the reporting of factual events effects dollars spent on Aspen. When that happens then they should just shut the paper down.