Scandal-tainted megabank JPMorgan Chase is losing legal ground in the wake of its multi-year crime wave (if the term “crime wave” seems harsh, we invite you to review the evidence here, here, and here.) But in the wake of its tentative $13 billion settlement with the federal government, it may be on the verge of winning at least one battle – in the court of public opinion.
Some people are convinced this deal victimizes America’s largest bank. A victim? In case you need a refresher course, here’s a much abbreviated list of the bank’s well-documented misdeeds (a full list is here):
Violations of the Bank Secrecy Act; laundering money for the Mexican drug cartels; violation of sanction orders against Iran, Cuba, Syria, and Liberian dictator Charles Taylor; knowingly executing fictitious trades; fraudulent sale of unregistered securities; bid-rigging; bribery in Jefferson County, Alabama; energy market manipulation; and mistreating active duty members of the Armed Forces by violating the Servicemembers Civil Relief Act.
And yet, despite its long and well documented string of frauds and other crimes, the bank is nevertheless gaining some sympathy for the argument that $13 billion is an excessive amount. Here’s why that’s not true.
Chase is feeling no pain.
The current stock price of $54.27 (as of this writing) is higher than it was one month ago, before the settlement was reached. It’s higher than it was two weeks ago. It’s higher than it was one week ago. It’s higher than it was on the last day of active trading, or the day before that.
Investors seem to think this is good news. But even banks with good luck can encounter an occasional injustice. Is that what’s happening here, as Chase’s defenders are claiming?
It’s not about the subsidiaries.
The most common argument one hears is that $13 billion is excessive because most of the misdeeds addressed in the settlement were committed by Chase acquisitions Bear Stearns and Washington Mutual, and that most of the wrongdoing took place before Chase acquired them. Here’s why that argument is wrong:
First, we only have only JPMorgan’s word for that – the bank has said that these subsidiaries are responsible for 70% or 80% of the fraud in question. Remember, CEO Jamie Dimon also told everyone – including investors, toward whom he has legal obligations – that the London Whale case was a “tempest in a teapot.” We now know he knew otherwise at the time he said it.
Secondly, we don’t know the total value of the fraud that may have been committed in this case. Even if we accept the possibility that Chase was only responsible for less than one-third of the fraud, which is their contention, it doesn’t necessarily follow that the bank should only pay one third of $13 billion. The entire fraud committed in this case may be significantly larger than that.
If it was greater than $39 billion then, even by that standard, this settlement might be reasonable or even too low.
It’s not a lot of money compared to the scope of the alleged misdeeds.
How big is the fraud in question?
The total volume of MBS and related securities for which Chase and its subsidiaries were being sued comes to $120 billion. This proposed settlement amount of $13 billion comes to slightly more than 10% of that amount – hardly extravagant for securities which were misleadingly packaged and presented as AAA, but which turned out to be junk.
The FHFA sued Chase over $33 billion in fraudulently package securities. In that case the bank reportedly defrauded the government, rather than consumers – the same government which Jamie Dimon feels spends too much money, and whose spending for vital social services Dimon tries to cut as a member of Fix the Debt.
$13 billion is less than two fifths of the amount addressed in the FHFA lawsuit.
For perspective, JPMorgan Chase’s total volume mortgage-backed securities for just one year, 2008, was more than $119 billion (according to the bank’s Annual Report). We still don’t know how much fraud this settlement is intended to address.
The bank is paying more than a fine or restitution.
The payments being made in this case constitute much more than simple restitution for harms done. Settlements should also include a punitive amount, and should be high enough to act as a deterrent against future fraud.
What’s more – and this may be even more important -the New York Times reports that the government initially demanded that the bank “plead guilty to a criminal charge” as part of the settlement. That demand appears to have been dropped, a concession which certainly must have cost the bank financially. And the criminal investigation currently being pursued in California involves wrongdoing by Chase itself, not Bear Stearns or Washington Mutual.
A guilty plea would involve serious reputational harm to Chase and would have additional legal implications in terms of oversight, governance, and regulatory involvement. Some of the $13 billion, therefore, is being paid in return for dropping the demand for a guilty plea – and whatever it cost them, Chase clearly thought it was worth it.
This is a deal Chase wanted.
Which gets us to our final point: This deal was not hammered out in a back room in some dusty courthouse, as the suspects sweated under the glare of naked light bulbs. It came about because Jamie Dimon called Attorney General Eric Holder four hours before the Justice Department was going to announce new civil charges against his bank – we wonder how he got wind of that, exactly? – and said he would prefer to come to a mutual agreement.
In other words, this deal was struck by a bank executive who still enjoys extraordinary access to top government officials. In fairness, it should also be noted that this tentative settlement seems to reflect a new and more aggressive posture toward Wall Street on the part of those same officials. That’s a good thing. But the agreement which resulted is, almost certainly, the best one Dimon could’ve gotten under the circumstances.
The world is filled with people who deserve your sympathy: 22 million Americans unemployed or underemployed in the wake of Wall Street’s financial crisis. Millions of Americans who lost their homes to foreclosure, many of them illegally. Millions of other Americans whose homes are underwater. Retirees whose pension plans are under political assault, with no thought to the bankers the defrauded those plans.
If you want to feel sorry for anyone, feel sorry for them. JP Morgan Chase is doing just fine, thank you very much.