By Duff McDonald
April 11, 2011

If I were a class action lawyer, I would aim for the deepest of pockets. It only makes sense, right? On Wall Street, that means suing JPMorgan Chase or Goldman Sachs. So it’s no surprise that another disgruntled set of institutional investors is suing JPMorgan for their own foolish mistakes. In this latest installment, we’re treated to a theory of a diabolical scheme that supposedly includes Jamie Dimon himself. It makes for great reading, but don’t kid yourselves, kids. Even Jamie Dimon isn’t clever enough to try to pull off a scam like this.

Here’s the short version of the alleged fraud: in 2007, an investment vehicle named Sigma — that JPMorgan did not own but into which it had poured $500 million in client assets — was struggling enough that alarms were going off in the giant bank. Nefarious JPMorgan executives then decided, in the edgiest of markets, that they would screw over their own clients by leaving those client monies in the fund, and instead lend it more than $8 billion in the hope of collecting valuable collateral in the event that Sigma went under. Even though they would then be required to auction off that collateral — another risk — they also apparently knew that no one would buy it and that they could then sit tight until the market recovered, sell off that collateral at a huge profit, and laugh all the way to the bank while their own clients were licking their wounds. (I know, this sounds like a Goldman Sachs story, doesn’t it? Maybe there’s one like it in Fortune contributor William Cohan’s new book, which comes out this week…)

Could it be true? Sure, it could. But the scheme is way too complicated, if you ask me. If you thought there would soon be a buyers’ market for assets held by Structured Investment Vehicles (SIVs) like Sigma, wouldn’t the truly smart thing be to advise your clients to get out — thereby preserving those relationships — and to not lend Sigma any more money, wait for the asset auctions to start, and then throw money at the fire sale assets, especially if you knew that there would be no other buyers? Why bother ruining client relationships in the service of a high-risk bet? (Again, this sounds like Goldman Sachs (GS), I know.)

Of course, some cynics might suggest that this “scheme” sounds similar to the whole subprime lending fiasco, in which banks lent money to high-risk borrowers even though they knew they were not creditworthy. But the two examples are actually quite different. The subprime lending game had an easy exit, which was the securitization market. It makes sense to lend to any and all comers — even those who you know can’t pay you back — if you know you can turn around and sell that loan right after you’ve made it. In that event, you’ve got no principal risk.

But translating Sigma into a housing example, the plaintiffs are essentially arguing that JPMorgan (JPM) lent money to subprime buyers in the hopes that they would default on their loans so that the bank could foreclose and then sell the houses sometime down the road when housing values had not only recovered, but risen substantially. Would you have bought into a scam like that? I wouldn’t. It’s too risky. Plus, you’ve got bankruptcy law and all that rigmarole. There are easier ways than that to bet that a cratering market will bounce back. The same goes for Sigma.

Don’t get me wrong. After reading the likes of my old pal Jesse Eisinger in ProPublica, I don’t put anything past Wall Street schemers. But this is a multi-factor bet that Wall Street people didn’t need to bother to make. There are too many easier ways to make money to bother trying this. Dimon makes guaranteed money when he opens an ATM. Does he really need to put $8.5 billion at risk in the hopes of catching a falling knife while simultaneously screwing his own customers? Don’t ask him, because he’s not talking about it. In his stead, Joe Evangelisti, spokesman for JPMorgan Chase, says there’s no more to say on the matter beyond official court filings but this: “The plaintiffs are wildly distorting the truth.”

They’re also doing a good job of keeping everyone’s eye off the ball. I’ve said this before, but I’ll say it again. The one group of people who have avoided their fair share of blame in the credit bust are the pension fund managers who invested these absurd vehicles at the tail end of the boom. What the hell were you thinking? Rather than a class action by you against JPMorgan, you should be the recipients of class action suits by your own investors. Of all the fools out there, you are surely the worst.

Like it or not, Wall Street people are paid to sell whatever the idiots will buy. But you were the guardians of pensioners’ money, and you squandered it on this kind of crap. Shame on you.

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