Why Believe What the Government Says About JPMorgan?

Jonathan Weil joined Bloomberg News as a columnist in 2007, and his columns on finance and accounting won Best in the Business awards from the Society of American Business Editors and Writers in 2009 and 2010.
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Leave it to a bunch of politicians to misrepresent what JPMorgan Chase & Co. admitted as part of a settlement over the bank's supposed misrepresentations.

There is much we still don't know about the deal that JPMorgan struck with federal and state authorities. So far, all the Justice Department has released is a news release, a statement of facts to which JPMorgan admitted, along with a listof mortgage bonds that were the focus of prosecutors' inquiries. The news release mentioned a settlement agreement, but that has yet to be disclosed. Prosecutors put a $13 billion price tag on all of the different settlements combined, but many details are unclear.

What we do know is that JPMorgan's pursuers are throwing around some serious exaggerations. In his own news release, New York Attorney General Eric Schneiderman said: "The global settlement includes a statement of facts, in which JPMorgan acknowledges that it regularly misrepresented to RMBS investors that the mortgage loans in various securities complied with underwriting guidelines."

The statement of facts included no such acknowledgement by JPMorgan. Similarly, the Justice Department in its news release said "JPMorgan acknowledged it made serious misrepresentations to the public -- including the investing public -- about numerous RMBS transactions." (RMBS stands for residential mortgage-backed securities.)

That characterization, too, doesn't match what JPMorgan said. Nowhere in the statement of facts did JPMorgan use the word "misrepresentation" or similar language to describe what it did. The bank didn't admit to violating any laws. The statement of facts didn't identify any specific people or bonds. For that matter, the Justice Department gave no indication that it would be filing court papers accusing JPMorgan of violating any laws, so its portion of the deal won't need a judge's approval.

Here in a nutshell is what JPMorgan admitted: Employees of JPMorgan and two failed companies it acquired, Bear Stearns and Washington Mutual, "received information that, in certain instances, loans that did not comply with underwriting guidelines were included in the RMBS sold and marketed to investors; however, JPMorgan, Bear Stearns, and WaMu did not disclose this to securitization investors."

That admission doesn't harm JPMorgan in the slightest. Receiving information isn't the same as knowing you received it when you received it. It falls far short of the proof that would be needed to prove a claim of fraud. In addition, JPMorgan admitted that it did due diligence as part of its offerings. It said its employees "were informed by due diligence vendors" that some of the loans it bought and packaged into mortgage bonds didn't comply with underwriting guidelines. That doesn't mean that JPMorgan admitted it agreed with those outside vendors.

JPMorgan did admit that it made representations and warranties about the loans backing its bonds, and that "in certain instances, at the time these representations were made to investors, the loan pools being securitized contained loans that did not comply with the originators' underwriting guidelines." Then again, of course they contained loans that didn't comply -- almost every loan pool does. That isn't the same as admitting to misrepresentations.

Later in the same statement of facts, JPMorgan recounted that one of its employees who was involved in a particular loan-pool purchase "told an executive director in charge of due diligence and a managing director in trading that due to their poor quality, the loans should not be purchased and should not be securitized."

After JPMorgan completed the purchase, "she submitted a letter memorializing her concerns to another managing director, which was distributed to other managing directors." The statement went on: "JPMorgan nonetheless securitized many of the loans. None of this was disclosed to investors." But look closely at those quotes: JPMorgan didn't say if it agreed with that employee's conclusions about the quality of the loans.

Moving along, JPMorgan also said:

"On some occasions, prospective investors in mortgage-backed securities marketed by JPMorgan requested specific data on the underlying loan pools, including information on due diligence results and loan characteristics, such as combined-loan-to-value ratios. JPMorgan employees sometimes declined to provide information to such investors concerning such loan data, including combined loan-to-value ratio data. In some instances, JPMorgan employees also provided data on the percentage of defective loans identified in its own due diligence process as a percentage of the pool that was acquired rather than as a percentage of the diligence sample, without disclosing the basis of their calculation."

All of which raises this question: So what? An admission of serious, material misrepresentations, this was not.

The Justice Department also stressed in its news release that "the settlement does not absolve JPMorgan or its employees from facing any possible criminal charges."

Considering what else the Justice Department said, that statement looks like a lot of hot air. Of this we can be fairly confident: There is nothing in JPMorgan's admissions that would be damaging to the company. JPMorgan's attorneys can be proud.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Jonathan Weil at jweil16@bloomberg.net