J.P.Morgan: Fish Rot from the Head
The New York Times’ spin of the tentative settlement of JPMorgan’s latest myriad felonies begins early and runs throughout the article. JPMorgan and Attorney General Eric Holder have reached a common meme on their settlement: the Department of Justice (DOJ) and Holder are stalwarts who have demonstrated their toughness and JPMorgan is a model corporate citizen. The inconvenient facts that the senior officers of JPMorgan, Bear Stearns (Bear), and Washington Mutual’s (WaMu) grew wealthy through the frauds that drove the financial crisis and that JPMorgan’s senior officers will not be prosecuted and will not even have to repay the proceeds of their crimes never appear in the article.
A word of caution is in order: I am discussing an article that is the product of leaks from DOJ and JPMorgan’s press flacks about a tentative deal, so reality is certain to differ from the spin. This article is a longer discussion of the settlement than my October 22, 2013 CNN op ed.
I am writing a side piece on the irony and implications of the civil and criminal investigation led by the U.S. Attorney for Eastern District of California, Benjamin Wagner. The NYT article suggests that his investigation is of former WaMu officers.
WaMu was one of the world’s largest criminal enterprises specializing in making fraudulent liar’s loans and then selling the fraudulent loans to the secondary market through fraudulent “reps and warranties.” These frauds destroyed WaMu. Dimon made the decision to buy WaMu – and to do so without receiving indemnification from the FDIC for any losses JPMorgan might suffer due to WaMu’s massive frauds.
JPMorgan purchased Bear and WaMu very quickly without conducting due diligence but that simply made the need for FDIC indemnification (or retention by the FDIC of Bear and WaMu’s fraud liability) all the more essential given WaMu’s notoriety on Wall Street for originating “liar’s” loans and Bear notoriety that inspired the phrase: “Bear Don’t Care.”
Here’s the NYT’s description of the tentative deal.
“The deal, which the Justice Department took the lead in negotiating and which came together after a Friday night call involving Attorney General Eric H. Holder Jr. and JPMorgan’s chief executive, Jamie Dimon, would resolve an array of state and federal investigations into the bank’s sale of troubled mortgage investments. That type of investment, securities typically backed by subprime home loans, was at the heart of the financial crisis.
While the deal would put those civil cases to rest, it would not save JPMorgan from a parallel criminal inquiry from federal prosecutors in California, the people briefed on the talks said. Under the terms of the preliminary deal, the people said, the bank would also have to assist prosecutors with an investigation into former employees who helped create the mortgage investments.”
The rate of spin accelerates thereafter like an ice skater pulling her outstretched arms inward to hug her body.
“The cost to JPMorgan, the nation’s biggest bank, goes beyond the bottom line. The settlement would deal a reputational blow to the bank and Mr. Dimon, who steered JPMorgan through the crisis without a quarterly loss or major government scuffle. Now Mr. Dimon’s tenure is engulfed in turmoil, the consequence of fighting a multifront battle with federal authorities scrutinizing everything from a $6 billion trading loss in London last year to the bank’s hiring of well-connected employees in China.
In the mortgage case, the size of the penalty underpins its importance. The $13 billion penalty, according to one of the people briefed on the talks, would include about $9 billion in fines and $4 billion in relief for struggling homeowners.
The $13 billion deal, which could still fall apart over issues like how much wrongdoing the bank is willing to acknowledge, would represent something of a reckoning for Wall Street, whose outsize risk taking in the mortgage business nearly toppled the economy in 2008. It might also provide a measure of catharsis to the investing public, which suffered billions of dollars in losses from buying bad mortgage securities.”
To the NYT, and one prays earnestly only the NYT, the “reputational blow” to JPMorgan and Dimon does not come from JPMorgan, Bear, and WaMu committing the largest and most destructive financial crimes in history – but from JPMorgan paying a miniscule percentage of the damage its officers’ frauds caused the world. The settlement does not require its controlling officers who grew wealthy from those crimes to return that wealth. The frauds by JPMorgan’s officers occurred while Dimon was in charge.
As I explained above, Dimon is also the one who thought, without due diligence and in the face of WaMu’s and Bear’s terrible reputation for fraud, that the purchase price from the FDIC was such a steal that JPMorgan should buy Bear and WaMu quickly without an FDIC indemnification lest a competitor snap them up.
Dimon had tried to acquire WaMu at a higher price prior to its collapse in September 2008 but WaMu’s incompetent management refused the deal. That deal also involved no FDIC indemnification and would have proved even more disastrous for JPMorgan. Similarly, Dimon was the proponent of buying Bear at a price he considered a steal – without any FDIC indemnification provision. Nevertheless, the NYT continues to portray Dimon as a genius.
The NYT article repeats Dimon’s claim that it is “unfair” to sue JPMorgan, which acquired Bear’s assets and liabilities, without any indemnification agreement, for its liabilities. The article presents no contrary view or facts. If Dimon had demanded an indemnification agreement JPMorgan would have had to pay a far higher price to acquire Bear Stearns and WaMu. He cannot choose to take the lower price and then claim that it unfair to follow the normal rule that a firm’s liabilities do not disappear because it is acquired by another firm.
I am, of course, kidding. Dimon can and does choose to take the lower price and claim that it is an outrage to hold JPMorgan liable. Despite the fact that Dimon’s claim is the actual outrage Holder is reported to have fallen for it.
William Kurt Black (born September 6, 1951) is an American lawyer, academic, author, and a former bank regulator in the Reagan and Bush 41 administrations. Black’s expertise is in white-collar crime, public finance, regulation, and other topics in law and economics. He developed the concept of “control fraud”, in which a business or national executive uses the entity he or she controls as a “weapon” to commit fraud.
“Muppet” is a term used to describe people that no one on Wall St. respects, such as clients of Goldman Sachs.