One thing I want to emphasize about the lawsuit against Bear Stearns on securitization fraud put together by Eric Schneiderman’s office is that it’s rooted in reality. Indeed, Bear Stearns did misrepresent to investors the quality of the loans they placed in mortgage backed security pools, did ignore warnings from third-party due diligence specialists about the loans, and did “double dip” by entering into settlements with originators about the worst loans, getting the originators to buy them back, and then keeping the proceeds without sharing them with the investors. That’s why I supported all the work done by the litany of investors and bond insurers who basically have pursued this legal argument for many years. As Elizabeth Warren says today in reaction to the lawsuit, “The facts here are clear:  Wall Street rigged the mortgage backed securities market against ordinary investors and made billions in profits off an unfair playing field.”

My issues are primarily with timing and scope. There’s no reason this case couldn’t have been filed in 2011. There’s literally nothing in the case that advances what we knew from these other cases in any meaningful way. If the New York AG’s office wanted to pursue a parallel proceeding, they had every ability to do it in 2011, before the foreclosure fraud settlement. By waiting until late 2012, they actually eliminated the ability to use their criminal Martin Act statute, and on the civil side, the foot-dragging means that only 6 months’ worth of this fraudulent conduct can be charged under the statute of limitations. Then there’s the entire issue of how the federal agencies with jurisdiction, from the SEC to the Justice Department, didn’t even participate in this case with their own parallel proceeding. This is nominally a “task force” case, but it relies on information gathered by Schneiderman’s office before a task force existed, and the main case it’s modeled on was filed by Schneiderman’s Deputy AG for Economic Justice when she worked for bond insurer Ambac in private practice.

Then, there’s the scope. This fairly uncreative lawsuit follows the precise paths already carved out by bond insurers and investors in their civil lawsuits against banks over securitization. In doing so, it ignores the elephant in the room; the potential that Bear Stearns, like most banks involved in this process, didn’t properly convey the mortgages in the pools to the trusts, making the mortgage backed securities invalid and threatening the chain of ownership on the underlying loan. This is securitization fail, the real bazooka in the hands of law enforcement, the one that has yet to be fully unholstered. We know that Schneiderman knows about it, because he made that argument last August, when he intervened in Bank of America’s proposed settlement with their MBS investors.

In short, Countrywide Financial, the lender purchased by BofA in 2008, failed to properly assemble loan documents needed for the creation of mortgage securities, and BNY Mellon effectively looked the other way, which “apparently triggered widespread fraud,” Schneiderman said in court documents.

BNY Mellon should have known the mortgage securities were improperly created because the evidence was “abundant,” Schneiderman asserted, citing the bank’s own documents, news coverage of “foreclosure fraud” and foreclosure actions brought on the bank’s behalf.

If you wanted to “create a second table,” to create a situation where banks would agree to just about anything because they had no way out, you would use the securitization fail arguments. The evidence is strong that Bear Stearns practiced this. But Schneiderman makes no effort to pursue that case here. In fact, he dropped the securitization fail angle from his re-intervention in the BofA case.

So in addition to being an untimely lawsuit, it’s one that pulls its best possible punch. Maybe that reflects a best practice I’m not aware of; maybe it’s more difficult than it looks to prove the failure to follow prescribed process on MBS. I would think it’s more like the fact that nobody wants to open this can of worms, because they’d be afraid on how to even proceed.