I mentioned this earlier when writing about the FCIC’s plan to refer individuals for potential criminal prosecution. But the Atlantic’s Teri Buhl has additional details about the Ambac lawsuit against the remnants of Bear Stearns. And it’s quite a doozy.

The mortgage traders at Bear, who now are spread out across the financial sector, sold purposefully bad securities to investors – emails revealed show that they told superiors they were selling “a sack of shit.” They got data on their pools of mortgages bundled up in securities deals that came back with high percentages of bad underwriting or even loans already slipping into default. They falsified that data for the rating agencies to get AAA ratings, never told the investors about the bad loans in the pools, and sold the shit as gold. But it gets worse.

But according to depositions and documents in the Ambac lawsuit, Bear’s misdeeds went even deeper. They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally’s mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans off its books [...]

According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds. The Marano-led traders also cut the time allowed for early payment defaults, without telling the bond investors. That way, Bear could quickly securitize defective loans, without leaving enough time for investors to do their own due diligence after the bonds were sold and put-back any bad loans to Bear.

They got paid by the investors for selling the mortgage-backed security, AND they got paid by the originator for taking back the bad loan. So Bear traders made money on the same mortgage twice. Only the investors could force a put-back on an originator after the security was sold – Bear Stearns didn’t have a legal claim on the loan after they sold it. They did so anyway.

There is no legal universe under the sun where that isn’t just criminal fraud and theft. Ambac eventually discovered that 80% of the loans in its MBS had an early payment default. They were corrupted and substandard from the moment they received them, so awful that Bear Stearns was forcing the bank to take them back – even though they didn’t own the loans.

This Ambac suit names the actual decision-makers, Marano and two others who are working at Goldman Sachs and Bank of America. JPMorgan, which now owns Bear Stearns, is named in the lawsuit as well, as a responsible party. It seems that this is a pretty standard repurchase lawsuit, but Ambac added accounting fraud to the claim to double the award owed to them. But there’s more to that story:

A public hearing is currently scheduled to be held by the New York State assembly regarding whether legal action should be brought against banks for misleading insurers about mortgage related securities. If approved, the New York Attorney General will likely be asked to bring criminal fraud charges against these banks. Now we must wait and see if JPMorgan will settle or go to trial — or if the bank tries to claw back tens of millions of dollars in pay from the former Bear executives.

This is precisely the kind of criminal prosecutions you will see in the FCIC referral. It’s endemic to the industry, which most resembles a criminal enterprise.