JPMorgan Chase & Co. has reached a tentative agreement with the U.S. Department of Justice (DOJ) to pay a staggering $13 billion fine related to its involvement in questionable mortgage-backed bond sales that contributed to the financial crisis of 2007-2008. Although the settlement represents the largest payout ever by a financial firm to the U.S. government, the mega-bank remains on the hook for an unresolved criminal inquiry. Dick Bove, an influential bank analyst at Rafferty Capital, accurately assessed the meaning of the deal. “This is a basic and fundamental attack on capitalism,” he said. “It is possible that the government is taking away the property of the JPMorgan shareholders without the shareholders having committed any crime or having any say in the expropriation of these funds.”
Such considerations are apparently irrelevant. JPMorgan CEO Jamie Dimon negotiated with U.S. Attorney General Eric Holder shortly after the financial markets closed last Friday. The broad strokes of the deal were reportedly reached in a phone call between Holder, Dimon, JPMorgan General Counsel Stephen Cutler and Associate U.S. Attorney General Tony West.
The tentative deal announced on Saturday remains somewhat unclear, but the Washington Post reports that $4 billion in relief will be aimed at homeowners, part of which may lower what they owe on their mortgages. Another $4 billion would be paid to the Federal Housing Finance Agency (FHFA), which regulates mortgage behemoths Fannie Mae and Freddie Mac. The deal also resolves a lawsuit fled by New York State Attorney General Eric Schneiderman with regard to the securities, as well as a California civil probe. The statement of facts that will be publicly announced remains unresolved.
JPMorgan was one of 18 banks sued by the FHFA for faulty mortgage bonds two years ago. In JPMorgan’s case, the FHFA accused the bank and its affiliates of making false statements and omitting material facts when they sold $33 billion of mortgage bonds to Fannie and Freddie between 2005 and 2007. Fannie and Freddie have received $187.5 billion in taxpayer-funded bailouts to date.
It is likely the final deal will require JPMorgan to cooperate in a criminal probe of those tied to the issuance of the allegedly dubious mortgage-backed securities. According to the unnamed source, Holder insisted that criminal liability would remain a separate issue. Nancy Bush, a bank analyst who founded NAB Research LLC in New Jersey, thought such a development was ominous. “To not get the waiver from criminal prosecution is not good,” she contended. “What we’re looking for in a settlement of this size is certainty from things like the criminal prosecution of a company. The Street wants certainty.”
Many financial analysts characterized the deal as blatantly unfair, perhaps rightly so. In a classic example of the bromide “no good deed goes unpunished,” they note that 80 percent of the mortgages under criminal investigation were acquired from Washington Mutual and Bear Stearns. Both of those failing banks were acquired by JPMorgan in 2008 at the request of the federal government, which needed the bank’s help to keep the crisis from getting even bigger than it was. JPMorgan’s own culpability involves mostly mismanagement, not investor fraud.
For others, the deal reeks of politics. In 2009, the New York Times referred to JPMorgan CEO Jamie Dimon as President Obama’s “favorite banker, and in turn, the envy of his Wall Street rivals.” “With the crisis, Mr. Dimon, a longtime Democratic donor, has become even more politically engaged, in the process becoming perhaps the most credible voice of a discredited industry,” the paper added.
A 2012 Politico profile was equally glowing, noting that Dimon was one of President Obama’s “most prominent Wall Street friends, a rare high-profile Democrat in an industry dominated by low-tax, free-market Republicans.” That friendship resulted in Dimon making 16 trips to the White House, including three meetings with Obama himself, as part of an effort to make the president seem more business-friendly.
All of that changed when Dimon, despite his Democratic leanings, began to criticize the administration’s economic policies during the 2012 election campaign. In May 2012, while characterizing America as a nation in possession of a “royal straight flush” represented by the world’s strongest military, best businesses, most entrepreneurial workforce and deepest capital markets, Dimon also cited three failings of the Obama administration: the debt ceiling crisis, the failure to adopt the Simpson-Bowles recommendations for fixing our financial crisis and the administration’s “constant attack on business.” When asked why corporate America wasn’t hiring more in a time of record profits, Dimon upped the ante, insisting that the 4 million jobs added by business had nothing to do with government policy. ”It should have been 8 million,” he said, whacking the administration yet again.
The New York Post’s Charles Gasparino noted the consequences of such candor. “By speaking out, Dimon became de facto public enemy No. 1,” he explains. Gasparino also reveals the strategy behind Eric Holder’s refusal to end the criminal probe, insisting the Attorney General’s demand for an some “concession of guilt…is basically a multibillion-dollar gift to the administration’s buddies in the trial bar, who are waiting anxiously to see exactly how much the bank will be forced to ’fess up to before their lawsuits start to fly.”
That Wall Street Journal is even more critical of the administration’s heavy-handed tactics. They characterized the effort to keep track of the government’s probes of the bank as tantamount to having a full time job. In conjunction with a tally taken by the New York Times, the Journal reveals there are investigations being conducted by “at least seven federal agencies” along with “seven investigations in the Justice Department alone, plus inquiries at other agencies.”
The reason for the ramped up effort? The Journal notes that JPMorgan did not need a taxpayer bailout when the 2008 financial crisis hit, and such independence is anathema to an Obama administration that “prefers dependent banks that quietly accept their role as money pots to be raided when politics demands. Mr. Dimon keeps deviating from the Obama script.”
Thus the long knives were out, and Dimon and JPMorgan gave the government the political ammo it needed when the so-called ”London Whale” trading scandal broke, costing the bank $6 billion, along with a hit to its reputation as a sound money manager. Despite incurring no public losses, conducting an investigation of its own and firing senior managers and traders for the debacle — while making record profits in 2012, despite the loss — JPMorgan became the poster child for Democrats seeking payback. They were furious that the loss exposed the inadequacies of the Dodd-Frank banking bill that was supposed to prevent large financial crises from reoccurring.
The Journal emphasizes three blinding hypocrisies associated with the efforts of the Obama administration and congressional Democrats to punish JPMorgan. They wonder how government regulators who “all but live at the bank” missed the London Whale scandal until JPMorgan notified them of it; how the government can portray Fannie Mae and Freddie Mac as “unwitting investors in mortgage securities” when their own unconscionable gambling on mortgages triggered the aforementioned $188 billion taxpayer bailout; and why Dimon, who helped end the mortgage crisis is being vilified, while Jack Lew, who “helped to oversee a disaster at Citigroup that would require serial taxpayer bailouts from Treasury and the Federal Reserve,” has become the Treasury Secretary.
Hypocrisy aside, there is no doubt that most Americans have little sympathy for anyone in a banking industry that has wholly emerged from the financial crisis, even as Main Street Americans continue to suffer. Yet it is useful to remember that the genesis of that crisis was a federal government determined to turn owning a home into a de facto affirmative action program in which banks were threatened with reprisals if they did not approve a certain percentage of questionable loans. That is not to say bankers are innocent, only that they are forced to operate within the parameters, no matter how reckless and tainted by corruption, government sets for them.
It is easy to miss the real story behind the effort to make JPMorgan and Dimon villains, much like the IRS effectively made villains of the Tea Party, or the State Department made a villain of jailed filmmaker Mark Basseley Youssef who was framed by Obama and Hillary Clinton for Benghazi. The real story is that no one is safe from political retribution in the age of Obama, not even the president’s former “favorite banker,” who is now learning what happens to those who dare to criticize this administration. “Washington is looting J.P. Morgan, and may yet string up Jamie Dimon, as a lesson in what will happen to any banker who dares to disagree with his Washington bosses,” the Wall Street Journal contends.
Thus, JPMorgan is on the hook for $13 billion, before the criminal lawsuits “begin to fly.” And while some Americans may gain a misguided sense of satisfaction in seeing a “fat cat” taken down, they would be wise to remember that there is no fatter cat than the federal government. They would be even wiser to note that the JPMorgan episode is another reminder that not even mega-wealthy former friends are safe from the Obama administration’s retribution.
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