The banking giant JPMorgan is set to pay a record $13 billion fine to settle investigations into its mortgage-backed securities. Five years ago, the bank’s risky behavior helped trigger the financial meltdown, including manipulating mortgages and sending millions of Americans into bankruptcy or foreclosure.
In a statement Friday night, JPMorgan called its latest settlement an “important step.” However, many in the media have portrayed the deal as unfair to the bank. The Wall Street Journal describes it as the government “confiscating” half of JPMorgan’s annual earnings to, “appease … left-wing populist allies” of the Obama administration. Meanwhile, the New York Post portrayed it as a kind of bank robbery, running a headline that read, “UNCLE [SCAM]: U.S. Robs Bank of $13 Billion.” JPMorgan said in a statement that its latest settlement is an “important step.” However, many in the media have portrayed the deal as unfair to the bank.
Yves Smith talking:
I’ve seldom seen a financial story where there’s been so much misreporting. For instance, the amount that’s going to be paid is still a bit in flux, but only $3 billion of that is actually going to be a fine. The overwhelming majority is for contract violations where the various banks, both JPMorgan itself and the two banks it acquired, Bear Stearns and Washington Mutual, did what amounted to promise investors that they were going to get steak, and instead it sold them hamburger—and, in fact, many times hamburger that was beginning to turn green. So, these claims are actually contract claims that are the liability something in the range of $100 billion to $200 billion they’ll be getting rid of. That portion of the settlement is only going to be around $10 or 11 billion. So they’re getting out of that part at under 10 cents on the dollar. This is actually a screaming bargain.
Jamie Dimon called Eric Holder. that’s because there was a—there is still in play that there may still be a criminal prosecution of the bank, not of individuals. There was a—the Department of Justice in California had been developing a case since 2007, and they—it was released in Reuters on—it was Monday, that they might be filing the criminal case as soon as Tuesday. And apparently Dimon called almost immediately, and they had a meeting on that Thursday. So it looks like it was the criminal suit that suddenly led to the desire to have some—
Should Jamie Dimon be indicted? We don’t know enough to know anything. I personally think he should be indicted on the London Whale. I’ve said that a long time ago. So we just don’t know enough in this case what the facts are. And if—we may not know, if he manages to settle that one.
now the numbers crept up, because the Federal Housing Finance Agency, they’ve actually been negotiating separately. Their deal went from $4 billion to $5.1 billion. But in any event, of that total, $4 billion of that isn’t even going to be in cash; $4 billion of the total settlement is in the form, homeowner relief. That can include things like short sales on securities that they sold, things the bank doesn’t even own. So—and we saw in the national mortgage settlement, the big one we had at the beginning of last year, that most of that has been things that really haven’t involved any real damage to the banks. The portion that’s paying for the hamburger instead of steak part is going to be tax-deductible. And it looks like there’s another fight that’s going on between the Department of Justice and JPMorgan, that they may be able to put $1.1 billion of that total amount to the FDIC. So the actual number that JPMorgan is going to wind up paying is vastly smaller than this number that’s being bandied about.
JPMorgan Chase violated the law part, we’re not—we’re not completely clear on JPMorgan proper. It’s important to understand there are three legal entities involved. One is Bear Stearns, which they acquired during the crisis. One is Washington Mutual, which they acquired during the crisis. Jamie [Dimon] was delighted to buy those both at the time. And we may get into that detail. These are still financially extremely attractive deals to him. So the idea that Dimon was in any way, shape or form a victim in doing these acquisitions is really overstated.
But the key part of this deal is that this is about liability to investors. So, the government—the government is representing, in this case, a whole bunch of states that have claims against JPMorgan and the different entities, as well as the FHFA, which Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, which entered into its own deal. But basically, the bank sold—these different banking entities sold bonds to investors that they said would be of a certain quality, and they were way short of that. And then, it was because they were, you know, lousy borrowers. They basically would say that it had a higher loan-to-value ratio; that the fellow had income, and he didn’t; that it was a primary resident, and it wasn’t—those sort of misrepresentations.
the thing that brought Jamie Dimon to the table was actually a criminal investigation which was initiated in 2007 under the Bush administration. It takes a long time to develop these prosecutions of these complex criminal frauds. So that’s why it’s been such a long lead time. And this settlement has been under negotiation for some time. There have been various investors, private investors, as well as the government, that has been pursuing these investor claims. So this has been sort of cycling through on all kinds of fronts. These suits—you know, for example, different other banks, Bank of America and, I believe, HSBC has settled their investor claims with the government. So those claims—they’re just cycling through those kind of settlements right now.
The settlement last year was the part—there was a huge federal-state settlement last year that was supposed to be about the homeowners. But in this case, this—these settlements are all about the investors. And so, what JPMorgan is going to pay in this settlement is larger than what it paid in the settlement last year to homeowners. I mean, that just intuitively seems extremely unjust, you know, the fact that investors are basically going to get a bigger dollar compensation out of all these banking entities than homeowners got last year. I mean, that’s crazy by anybody’s standards.
how this money will be paid, is s very complicated, because this is being presented as one settlement. That’s part of how the numbers got so big. And, in fact, it’s a whole bunch of settlements that have been piled together. That’s why the numbers are so large. So, the biggest piece of this is from the Federal Housing Finance Agency. That’s the regulator of Fannie Mae and Freddie Mac. They bought a lot of subprime bonds and some subprime loans. And that’s the issue I mentioned earlier, where they were promised steak, and they got hamburger that was significantly green. So, that’s a—what they call in the law a contract claim. They were promised X, they got Y. It’s no different than if you bought a car and discovered it was a clunker and went back to the manufacturer and said, “Hey, you know, either fix this car or give me a new one.” The concept is exactly the same as that of these suits. So it’s all—these are all contract claims, except—except for one piece, which is a fine that comes at—which is a—there’s apparently a civil fine that’s about $3 billion. That’s the one piece that’s different. The rest of the deal is all about that kind of liability, the getting-hamburger-when-you-were-promised-steak issue.
One thing investors say is “When the government is selling, you want to be on the other side of that deal.” And Jamie Dimon is one of the most sophisticated and experienced acquirers of financial institutions in the world. He’s literally done over a thousand deals. In fact, let’s go to—let’s go to the numbers on Washington Mutual. When they bought that company, it had—I hate to go through numbers, but we have to go through numbers to understand why this is so ludicrous—they had $40 billion in equity. JPMorgan wrote that reserve for $36 billion in losses. He expected $36 billion in losses. This is just chickens coming home to roost, that were anticipated at the time they did the deal. And even with writing down the bank equity at $36 billion, he booked a $2 billion profit at the time he bought that bank. Last quarter, they reversed another $750 million out of those reserves, meaning the deal has done even better than they expected. And on top of that, Washington Mutual was predicted at the time he bought it to earn $2.5 billion a year. He has made out wonderfully on Washington Mutual. Crying that this was a bad deal is ludicrous.
the idea that this settlement is that large or that punitive is really overstated. Both these institutions have made—were strategically very valuable to Chase. They have made the bank a lot of money. They reserved for these losses. And they’re going to get—they may get money back from the FDIC for a portion of this. This is something that they’re wrangling with the government right now. And they’re going to get a significant tax deduction. So this—the victim meme is astonishing to me.
Jamie Dimon doesn’t have a successor lined up, and he’s got a cooperative board. He’s managed to create the myth that he’s indispensable. So, if his board isn’t willing to do anything, then he basically stays in place. That’s the way it works in corporate America. I mean, it’s unfortunate.
The issue with the London Whale was that there was a unit in the bank where basically, in general—called the chief investment office, where JPMorgan was taking advantage of accounting rules. You’re basically supposed to use that kind of a kitty to help the bank’s treasury. The bank has—all these banks have huge amounts of money flowing in and out that they have to invest on a short-term basis. And so, they’re given very permissive accounting treatment for the money they keep in those units.
He was basically running a prop trading desk in that bank. Proprietary trading means when they’re taking significant speculative risks. that’s a—so, and when you compare the risks they were taking in that unit compared to the risks that other banks were taking, it was way out of line.
Now, on top of that, it turns out that they had—they, in particular, took a derivatives bet, which initially one of the traders—was going bad, and when the traders wanted to close out the position, they decided the losses were going to be so big that maybe they could somehow—you know, traders tend to do that: When they get in a panic, they try schemes to earn, to make more money, and they usually make things worse. In this case, they made things worse. The losses ballooned even bigger.
But the really bad part about this wasn’t just the losses; it was JPMorgan’s—more serious was JPMorgan’s conduct while this was going on. They first got up in the press and basically said nothing was happening. They greatly understated the amount of possible losses. They—for a two-week period, the main regulator of this particular entity, the Office of Comptroller of the Currency, asked for reports, and they basically made up “dog ate my homework” excuses, that somehow, “Oh, we were having computer problems, and we couldn’t get the information to them.” I mean, the way they treated the regulator was really outside the pale. And frankly, Dimon made very serious misrepresentations to investors during this period.
Now, if that isn’t bad enough, under the Sarbanes-Oxley, which was a series of laws passed after Enron, that was supposed to eliminate the “I’m the CEO, and I know nothing” excuse. Sarbanes-Oxley specifically provides that at least the chief executive officer, which is Jamie Dimon, and the chief financial officer certify the financial reports for their accuracy, and they’re also required to certify the adequacy of internal controls, which would include risk management. One of the things, as there were investigations and more and more was unearthed about this, is that the risk controls they had for this unit were grossly deficient. I mean, Wall Street professionals, when they heard about some of the things that were going on, were appalled. And Sarbanes-Oxley provides not just for civil liability. It provides for criminal. The language is almost identical. You could literally take a—you could start out with a civil case, and once you did discovery, if you thought the violations were serious enough, you could flip the same case to criminal. And I don’t understand why there hasn’t been—they haven’t gone this route with Dimon. I mean, it’s clearly that he’s in a protected class.
the other thing that was striking about that hearing, aside from a few exchanges like that, was that Dimon clearly dialed in his testimony. I have never seen a CEO show up for a hearing who was so clearly not prepared. Normally they’re very scripted. He was just—his attitude could not have been more dismissive.
In terms of they didn’t need a bailout, that’s baloney. They had actually gotten a massive bailout before the AIG bailout, which they never acknowledge. Remember when Lehman went under, one of the things that happened in the week—it was basically about a week after Lehman failed was that there started to be runs on money market funds, and they had to guarantee up to $250,000 all the funds and money in money market funds. Had that not happened, JPMorgan would have been in terribly serious trouble, because the money from money market—this is, again, very technical, but the money in money market funds finances a sort of short-term loan that banks make among themselves called “repo.” It’s agreement to sell secure—sales of securities with agreement to repurchase—that’s a technical term. But JPMorgan is one of two banks that are the hubs in this repo system. So instead of banks doing repo with each other, they go through JPMorgan. And so, the bailout of the repo system, through this money market guarantee, was directly a bailout of JPMorgan. They got one of the biggest bailouts before any of the other ones happened. And similarly, a lot of people have said, to the point that Jeff Merkley tried raising about AIG, that if AIG had gone under, Goldman would have gone under, Morgan Stanley would have gone under. There’s no question JPMorgan wouldn’t have been engulfed. I mean, the fact—the worst is Dimon seems to believe his own PR. That’s the really scary part of watching him.
a jury last week found Bank of America’s Countrywide—the unit of Countrywide liable for defrauding Fannie Mae and Freddie Mac with loans it should have known were substandard, the penalty yet to be determined. The government has requested a maximum of something like $850 million.
it’s good to see a fraud prosecution, finally. But this is sort of illustrative of the whole sort of “too little, too late.” Only one executive was prosecuted. It was a fairly mid-level woman. The jury apparently sent a note to Judge Rakoff saying, “How come there are no other executives here? Why is she the only one we’re being asked to find guilty?” Apparently they thought that it wasn’t possible that only one executive could be responsible for the conduct.
I guess he basically said, “Sorry, you know, you’re not here to ask those questions. You’re only here to rule on what the prosecutors put before you.”
And the larger question is it’s almost impossible that this wasn’t approved and vetted at higher levels. I mean, that’s been the tendency, to the extent that anybody—if there have been any prosecutions, it’s either been small institutions or executives that could be thrown under the bus.
Jamie Dimon can pick up the phone last week when his bank is being criminally investigated and, you know, call the attorney general, Eric Holder. A lot of lawyers and law professors are outraged. I mean, that’s really unheard of. And it, again, speaks to sort of the impropriety and the significant financial influence that JPMorgan has in the capital. They’ve been one of the biggest donors, basically to both parties. And Dimon even said at one point during the crisis that he had a sixth line of business, and that was dealing with Washington, D.C.
– source democracynow.org
Yves Smith, financial analyst who founded the popular finance blog Naked Capitalism. She is the author of the book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.