Alayne Fleischmann was a lawyer with JP Morgan in 2006 who tried to alert her managers to the bank’s policy of re-selling sub-prime mortgages to investors without warning them of the danger.
The sale of toxic sub-prime loans – by JP Morgan and many other US banks – triggered the crisis in the US housing market that exploded into the global financial crisis of 2008, officials say.
The JP Morgan repackaged loans were sold to pension funds and other investment schemes who were unaware of the high risk of default attached to the products.
Former JP Morgan lawyer turned whistleblower Alayne Fleischmann.
One loan investigated by Ms Fleischmann involved a manicurist who said she was earning $117,000 a year.
According to Ms Fleischmann, the manicurist would have had to work 488 days in a single year to earn that amount.
Yet, managers in JP Morgan were happy to include this loan in a low-risk package.
After witnessing a number of suspicious loans, Ms Fleischmann tried to alert senior officials in the bank about her concerns.
She had discovered that with some random samples, 40 per cent of mortgage holders had overstated their incomes – leading to a higher risk of default.
Ms Fleischmann said she warned senior management that the bank could not sell on any product including these loans without making a special disclosure that warned a potential investor about the poorly performing elements.
She said that with if such as disclosure was included, nobody would buy the product.
She told Rolling Stone magazine: ‘It used to be if you wrote a memo, they had to stop, because now there’s proof that they knew what they were doing. But when the Justice Department doesn’t do anything, that stops being a deterrent. I just didn’t know that at the time.’
Ms Fleischman claimed one of her managers wanted to institute a no-email policy to eliminate any paper trail.
She said: ‘If you sent him an e-mail, he would actually come out and yell at you. 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.’
JP Morgan made a $9 billion settlement with the US government for its sale of sub-prime mortgages.
Ms Fleischmann said she was let go from the bank in February 2008, and two years later she was approached by the Securities and Exchange Commission.
When leaving JP Morgan, Ms Fleischmann had to sign a non-disclosure agreement, although this did not prevent her from discussing any criminal wrongdoing.
She briefed federal prosecutors about the concerns she had regarding the selling of sub-prime mortgage products.
Prosecutors used that evidence to broker a $9 billion settlement with the bank, which has so far prevented any criminal prosecutions.
At the time of the settlement, US Attorney General Eric Holder praised the deal, which included an additional $4 billion relief for under-pressure homeowners to help them stay in their house.
He said: ‘Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown
‘JP Morgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior. The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over.
‘No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.’
JP Morgan CEO Jamie Dimson, pictured, led the bank through the sub-prime mortgage crisis and investigation
At the time, Mr Holder said the Department of Justice investigation was continuing.
Associate Attorney General Tony West said: ‘Through this $13billion resolution, we are demanding accountability and requiring remediation from those who helped create a financial storm that devastated millions of Americans
‘The conduct JP Morgan has acknowledged – packaging risky home loans into securities, then selling them without disclosing their low quality to investors – contributed to the wreckage of the financial crisis. By requiring JP Morgan both to pay the largest FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act) penalty in history and provide needed consumer relief to areas hardest hit by the financial crisis, we rectify some of that harm today.’
US Attorney for the Eastern District of California, Benjamin Wagner condemned the actions of JP Morgan.
He said: ‘Abuses in the mortgage-backed securities industry helped turn a crisis in the housing market into an international financial crisis.
‘The impacts were staggering. JP Morgan sold securities knowing that many of the loans backing those certificates were toxic.
‘Credit unions, banks and other investor victims across the country, including many in the Eastern District of California, continue to struggle with losses they suffered as a result. In the Eastern District of California, we have worked hard to prosecute fraud in the mortgage industry.
‘We are equally committed to holding accountable those in the securities industry who profited through the sale of defective mortgages.’
Ms Flesischmann said she knew that by speaking to Rolling Stone, she risks being sued by JP Morgan.
She said: ‘The assumption they make is that I won’t blow up my life to do it. But they’re wrong about that.’