Editorial Board

JPMorgan’s $13 Billion Lesson

$13 billion is a lot of money. The amount, which JPMorgan Chase & Co. has tentatively agreed to pay to settle numerous mortgage-related claims, has been variously

described as excessive, unfair and, in one overheated instance, a tribute that President Barack Obama’s minions extracted from the bank “to appease their left-wing populist allies.”

There is, of course, another way to look at it: It simply shows the rule of law operating as it should.

Yes, $13 billion is the largest amount paid by a financial firm in a settlement with the U.S., and it equals more than half of JPMorgan’s 2012 profit. Yet the deal encompasses investigations by three U.S. attorneys, two state attorneys general and three federal regulators.

And keep in mind the scope of the alleged misdeeds. The Federal Housing Finance Agency charged JPMorgan in a 2012 lawsuit with routinely understating important measurements that investors relied on to gauge default rates, including loan-to-value ratios and the percentage of non-owner-occupied homes. The bank allegedly failed to follow its own underwriting guidelines when approving loans and used appraisals that it knew were inflated. Even when third-party firms that the bank hired to conduct due diligence said many of the loans didn’t meet bank guidelines, it packaged them into securities anyway, the lawsuit says.

Despite being one of the largest mortgage issuers in the U.S., the bank had only five or six people on its due-diligence desk, which had to review as much as $2 billion in loans a month. Barry Zubrow, the bank’s chief risk officer, told the U.S. Financial Crisis Inquiry Commission that “there was a tradeoff between certain financial covenants and protections versus a desire to maintain market share.”

The FHFA is not singling out JPMorgan. At least 16 other banks face similar probes -- including Bank of America Corp., from which the U.S. is seeking at least $6 billion. And while it’s true that the settlement covers claims against Bear Stearns Cos. and Washington Mutual Inc., both of which JPMorgan took over at the government’s urging in 2008, this isn’t unusual or unfair. When Fiat SpA bought Chrysler Group LLC, it became liable for the warranties on Chrysler’s cars.

Anyway, JPMorgan has reaped benefits from those acquisitions, both completed for less than a song. It booked a $2 billion gain when it bought $3.9 billion in Washington Mutual equity for $1.9 billion. Some of the mortgages it inherited may be performing well enough for the bank to record gains in upcoming quarters. The Federal Reserve Bank of New York financed the Bear Stearns purchase -- which came with a lucrative prime brokerage unit plus a midtown Manhattan skyscraper -- with a $30 billion loan.

It’s also true, as some critics of the settlement point out, that the government should have overhauled Fannie Mae and Freddie Mac long before the housing bust, and regulators should have required banks such as JPMorgan to have more capital to absorb mortgage losses.

Still, it’s a leap to go from this argument -- that the government encouraged easy money and excessive risk-taking -- to say that it countenanced illegal or even criminal behavior. No one forced JPMorgan to violate its own underwriting rules, pursue market share at any cost, file materially false prospectuses, or put a bare-bones team in charge of due diligence.

It’s also important to note that, even with the $13 billion payment, JPMorgan isn’t out of the woods. An investigation of the bank’s bond sales by a U.S. attorney in California won’t be part of the settlement, raising the possibility that JPMorgan may have to defend itself against criminal charges. The bank also faces investigations into its hiring practices in Asia and whether it aided Bernard Madoff’s Ponzi scheme.

Jamie Dimon, JPMorgan’s chairman and chief executive officer, is reported to have personally pursued this settlement with the federal government. If he and the bank’s board think it’s unfair, they are free to reject it. The best answer to charges of unfairness may well be their decision not to do so.