Penalties for Mortgage Bond Flaws Seen OK With Investors in PollDawn Kopecki
Penalties against some of the biggest banks for actions such as selling shoddy mortgage bonds and rigging interest rates were deemed too high by 28 percent of respondents to a Bloomberg Global Poll, while a majority said they were about right or too low.
The fines paid by JPMorgan Chase & Co. and other large banks since the financial crisis were about right, according to 28 percent of Bloomberg subscribers who participated, including traders, analysts and bankers. About 26 percent said penalties imposed by the U.S. Justice Department and other regulators were too low, and the rest said they didn’t know.
“All of us saw what happened in 2008 where these abuses literally could have taken down our financial system and likely should have,” said David Jaderlund, 55, an independent municipal bond trader in Sante Fe, New Mexico, who responded to the poll. “No one’s really gone to prison for all of this, no one’s even gone to court. You see these guys testify before Congress, but why aren’t they in jail?”
JPMorgan agreed this week to a record $13 billion accord to end civil claims that it misled investors who bought mortgage bonds sold by the company. The deal, while resolving some state and federal probes, doesn’t rule out possible criminal charges against the bank and its executives. The lender still faces other Justice Department probes, including those into rigging of foreign-exchange markets, alleged bribery in Asia and the firm’s relationship with Ponzi scheme operator Bernard Madoff.
JPMorgan, which posted a record $21.3 billion profit in 2012, may earn $18.3 billion this year, according to the average estimate of 13 analysts in a Bloomberg survey. That’s after the company reported a $7.2 billion litigation charge in the three months ended Sept. 30, fueling the first quarterly loss for Chairman and Chief Executive Officer Jamie Dimon.
“The absolute amount of the fine is very huge, but in relation to the profit of the bank, they have only lost about half a year,” said Michael Fuxa, a poll respondent and head of investments for uniVersa Life Insurance Co. in Nuremberg, Germany. “That is not really a big deterrence to be more honest in that kind of business.”
A plurality of 38 percent of poll respondents said the fines were both excessive and politically motivated, while 31 percent said they weren’t sufficient to change bad behavior and 20 percent said they were justified by the amount of wrongdoing. The rest said they didn’t know.
Europe’s biggest banks, led by Lloyds Banking Group Plc and Deutsche Bank AG, have piled up more than $77 billion in legal expenses since the financial crisis, five times their combined profit last year, data compiled by Bloomberg show.
The six biggest U.S. banks, led by JPMorgan and Bank of America Corp., amassed more than $100 billion in legal costs since the credit crisis, more than all dividends paid to investors in the past five years. JPMorgan set aside $28 billion in reserves since 2010 to cover legal costs, which almost half of respondents say will remain elevated or are likely to rise. More than a third said legal expenses probably will fall.
JPMorgan shares climbed 40 percent in the past 12 months, outperforming the 37 percent advance for the 81-company Standard & Poor’s Financials Index and the 29 percent gain for the broader S&P 500.
The Nov. 19 agreement with the Justice Department “is nothing more than political smoke and mirrors,” said Price Johnson, 53, an individual investor in Oxford, Mississippi, who responded to the poll. “A penalty large enough, and structured in a way to cause the stock price to drop, say 50 percent, would probably result in the stated desired deterrent to crooked behavior.”
The poll of 750 Bloomberg subscribers was conducted on Nov. 19 by Selzer & Co., a Des Moines, Iowa-based public opinion research firm, and has a margin of error of plus or minus 3.6 percentage points.