Holder’s Credit Grab at JPMorganJonathan Weil
Nov. 8 (Bloomberg) -- These are confusing times to be a consumer of financial journalism. Sometimes it seems as if everyone in the business world is trying to inflate their numbers, especially the cops.
It has been about three weeks since news first broke that government lawyers had reached a civil settlement with JPMorgan Chase & Co. with a price tag of $13 billion. We haven’t seen the paperwork, because the terms aren’t final. Yet it’s obvious from the many leaks to the news media that the Justice Department is trying to grab credit for the full amount. And often a couple of key facts keep getting left out of the coverage: The deal includes several state and federal agencies. And the Justice Department’s piece would be much less than $13 billion.
At least $4 billion had little if anything to do with the Justice Department. That’s how much JPMorgan agreed to pay Fannie Mae and Freddie Mac to resolve a 2011 lawsuit filed by their government conservator, the Federal Housing Finance Agency, in a settlement disclosed Oct. 25. Of course, it’s easy to see why the Justice Department wants to include this $4 billion: to make its own headline number look bigger.
Deal-padding has become standard practice for the government when parading white-collar scofflaws. This week, federal prosecutors in New York unveiled a guilty-plea agreement with SAC Capital Advisors LP that included $1.8 billion in penalties. The firm won’t pay that much, though. U.S. Attorney Preet Bharara’s office gave Steven A. Cohen’s hedge fund a $616 million credit for a settlement it reached in March with the Securities and Exchange Commission. Prosecutors could have skipped the complexities and called this a $1.2 billion penalty. But $1.8 billion is more, which explains why they went with that.
Similarly, as Los Angeles Times columnist Michael Hiltzik has pointed out, the $25 billion headline number on last year’s national mortgage settlement between large banks and federal and state regulators was a farce. Only $5 billion was cash. The rest was credits that the banks got for modifying underwater mortgage loans, which probably was in their interest to do anyway.
Sometimes the inflation is less obvious. At a media event last year, the Justice Department said 530 defendants had been charged criminally as part of a yearlong initiative on mortgage fraud. In August, long after being called out by Bloomberg News reporters who figured out that number was bogus, the department admitted the actual figure was 107, or 80 percent less.
In an amusing twist, the Justice Department’s attempt to claim credit for all $13 billion from JPMorgan has sparked a needless backlash against the department itself. Several news outlets have noted that a big chunk would be tax-deductible for JPMorgan. This has sent a bunch of politicians into a tizzy.
On Oct. 29, five U.S. senators, including Massachusetts Democrat Elizabeth Warren, wrote a letter to U.S. Attorney General Eric Holder saying they “are troubled by the numerous media reports that indicate the settlement being negotiated may allow JPMorgan Chase to claim a tax deduction for as much as $4 billion, or roughly 30 percent of the settlement amount.” They complained that it would, “in effect, shift part of the settlement cost from JPMorgan Chase onto Main Street taxpayers” and urged Holder “to prevent this from happening.”
Judging by what they wrote, it seems that it hadn’t dawned on the senators that the $4 billion represented the amount that JPMorgan is paying under its agreement with the Federal Housing Finance Agency. Nor should it shock anyone that this money would be a deductible expense: The 2011 lawsuit by the housing-finance agency wasn’t a law-enforcement matter; it was a business dispute. Nothing more.
The agency sued JPMorgan in its capacity as conservator for Fannie and Freddie, claiming that mortgage bonds they bought from JPMorgan before the financial crisis weren’t as advertised. For these purposes, the agency was an ordinary plaintiff suing for damages. It hired an outside law firm to litigate the case. And when the parties settled, they stipulated that the agreement didn’t constitute an admission by JPMorgan “of any liability or wrongdoing whatsoever.”
The Justice Department never should have included the $4 billion in its own leaked settlement figure. But because it did, some people concluded that the whole $13 billion was related to law enforcement.
The housing-finance agency has reached similar settlements with several other large banks. It even let some of them, including Citigroup Inc. and Wells Fargo & Co., keep their settlement terms confidential. Those banks, too, will get to claim tax deductions. But you don’t see prominent lawmakers firing off letters to Holder complaining about the deals with Citigroup or Wells Fargo -- because the Justice Department isn’t trying to take credit for them and the details aren’t public.
Many investors have come to expect creative accounting nonsense from big corporations trying to make their results look better. But the public should demand better from the Justice Department. When prosecutors put out misleading numbers, they undermine the government’s moral authority to enforce the law. Here’s a simple request for Holder: Please stop.
(Jonathan Weil is a Bloomberg View columnist.)
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