America’s New Pastime: JPMorgan InvestigationsJonathan Weil
Hardly a week goes by without a new report about a government investigation of JPMorgan Chase & Co. and how much money the bank might have to pay because of some alleged violation of the law.
The ritual is familiar by now. Details of the probe emerge, then settlement talks get leaked by one side or the other before the case is resolved, perhaps as a pressure tactic or to alert the market so that the final deal is barely news once it’s unveiled. And the outcome proves unsatisfying because the company doesn’t admit liability for breaking any specific laws.
The cases often present a bounty of ironies for a company that has reported $21.3 billion of legal fees and litigation costs since the start of 2008, which is almost as much as it paid in shareholder dividends. Sometimes the proceedings seem like bona fide attempts at law enforcement, notwithstanding that JPMorgan will always be afforded special treatment as a too-big-to-fail bank. Other times the payments look like a mere cost of doing business, with no moral judgment attached, even if the claim is something as serious as fraud.
A couple of recent examples: This week the Financial Times and other news organizations reported that the Federal Housing Finance Agency, which is the conservator for Fannie Mae and Freddie Mac, recently demanded a $6 billion settlement from JPMorgan in a lawsuit it filed two years ago over faulty mortgage bonds that Fannie and Freddie bought.
Some of those bonds were sold by JPMorgan. It’s also true that a large portion were sold by Washington Mutual Inc. and Bear Stearns Cos., which the government practically begged JPMorgan to buy in 2008 to keep the financial system from going kaput. JPMorgan assumed those companies’ liabilities, of course, and now finds itself facing some that perhaps it hadn’t counted on and weren’t of its own doing.
Separately, the Wall Street Journal reported this week that JPMorgan may pay as much as $600 million to resolve various investigations of the London Whale scandal, in which the bank lost control over some of its derivatives traders and wound up losing more than $6 billion. The Securities and Exchange Commission has insisted that JPMorgan admit wrongdoing -- whatever that’s supposed to mean -- as part of any civil settlement, according to news reports.
That doesn’t mean JPMorgan would have to admit legal liability. It probably won’t, based on precedent. So once again, the SEC would allow admissions of liability to be a sort of third rail that it refuses to require of settling defendants. Heaven forbid that other litigants might use it against the company in separate proceedings.
And whom would a $600 million penalty hurt? In this case, the shareholders, of course. It’s debatable whether this is a just outcome. This isn’t like the $410 million that JPMorgan agreed to pay the Federal Energy Regulatory Commission last month for manipulating electricity markets. Shareholders deserved to be penalized in that instance, because they benefited from the company’s alleged misconduct in the form of extra profits. (This week, a Senate investigative panel sought records on that case, adding yet another headline to the company’s clip file.)
In the London Whale matter, investors were harmed by JPMorgan’s poor internal controls and inaccurate financial reports, not to mention the $6.2 billion trading loss. Fining the company arguably would penalize some shareholders twice -- but not all of them. Those who bought the stock shortly after the scandal broke last year have done well because the price rebounded fabulously. The trading debacle is what created their buying opportunity. (JPMorgan shares were recently trading for about $50 after bottoming at $31 in June 2012.)
Another way of looking at this same case: Perhaps fines against the corporation are warranted -- not because of any harm JPMorgan caused to its investors, but because of the risk the bank poses to the country were it to have a total meltdown in controls and tank the economy.
Meanwhile, two former JPMorgan traders have been criminally charged over their conduct in the London Whale affair. The prosecutors couldn’t find sufficient evidence on anybody higher up than them -- such as the executives who created the incentives and the control environment in which they operated.
As for JPMorgan, it’s no secret that the government can’t enforce the law to its fullest extent. An indictment of the company, if one were ever warranted, could jeopardize the financial system and the economy. Both the Justice Department and the SEC in recent years have attached provisions to settlement agreements with JPMorgan in which the company agreed not to violate the law again. Those “obey-the-law” directives almost never get enforced against repeat offenders, and there’s scant reason to believe they would be against JPMorgan.
We simply don’t have a good way to punish big financial institutions for breaking the law. This, of course, encourages law-breaking. It’s hard to see this changing. Too many competing economic and political forces get in the way. If the government won’t let big banks fail, it isn’t about to try to kill them off. Still the prosecutors and regulators feel obligated to show they’re doing something.
JPMorgan’s shareholders are accustomed to the headlines. They can’t be pleased about them. In its latest quarterly report, the company disclosed six investigations by the Justice Department alone. This week we learned the Justice Department had joined another one: a bribery probe of the bank’s hiring practices in China. It could be years before the company gets its name out of the police blotter.
Jamie Dimon, JPMorgan’s chairman and chief executive officer, must be longing for the days when the big news about his bank was all the things it did right.
(Jonathan Weil is a Bloomberg View columnist.)
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