In resolve a handful of state and federal investigations, JPMorgan Chase (JPM) has tentatively agreed to pay $13 billion—more, as my colleague Nick Summers points out, “than the combined salaries of every athlete in every major U.S. professional sport, with enough left over to buy every American a stadium hot dog.” Thirteen billion is also equal to 61 percent of the bank’s profit for 2012, so it’s a significant sum. But does that make it a “shakedown,” as some have suggested?
The arguments of those who say yes are as follows: Much of the penalty is related to sales of mortgage securities by Bear Stearns and Washington Mutual, companies JPMorgan took over in 2008 in the midst of the financial crisis at the urging of the government. It is therefore unfair, the thinking goes, for the same government now to penalize the bank for the sins of those two and demand money to compensate for those sins. But this argument neglects two important points—that those takeovers were considered very good deals for JPMorgan at the time, and that the proposed $13 billion penalty applies to activity that goes beyond what Bear Stearns and Washington Mutual were involved in.
This settlement comes in response to a handful of government investigations of sales of mortgage securities leading up to the financial crisis. The proposed $13 billion has several components:
• Approximately $6 billion is earmarked for investors who took losses on mortgage securities;
• $4 billion is intended to relieve struggling homeowners;
• $2 billion to $3 billion would be an actual fine (which applies to the actions of JPMorgan itself, not to activity of Bear Stearns or Washington Mutual).
This comes right after the bank agreed to pay $100 million to the Commodity Futures Trading Commission and admit wrongdoing in the London Whale trading disaster, and a month after it agreed to pay $920 million in fines to the Federal Reserve, the Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the U.K.’s Financial Conduct Authority over claims related to the London Whale. And that’s only this fall—other fines for other transgressions have been agreed to going back months, and more may come in the future. The bank also remains a subject of a criminal investigation related to mortgage securities, which could implicate individual executives.
One could argue that JPMorgan, as a regulated entity that requires the backing of the government to function, is not in a position to negotiate. As JPMorgan Chief Executive Jamie Dimon has made clear, its only option is to resolve these matters as quickly as possible so it can return its focus to what it has become very good at—churning out enormous profit. But there’s no getting away from the fact that the Obama Administration has taken a great deal of criticism over the lack of accountability pertaining to the financial crisis and for not punishing those who had a role in bringing the economy near collapse. This tough new stance suggests that the awkward-but-friendly dance that previously existed between Obama and Wall Street has become more hostile. The government is playing catch-up right now, and it will be for a while.
Meanwhile, JPMorgan shareholders will continue to pay huge settlements and penalties while being left with the uneasy feeling that many of the executives who had a role in the problem-causing behavior in the first place are still in their jobs. The mounting fines may be a result of some opportunism on the regulators’ part, but at this point, that’s probably unavoidable.