Tuesday afternoon, the Department of Justice announced a final $13 billion agreement with JPMorgan Chase over the risky mortgage practices and financial securitization practices that lead up to the 2008 financial collapse.
So what’s in the settlement, and how far does it go in truly making the financial sector accountable for the widespread economic misery it caused five years ago?
What wrongdoing is JPMorgan paying for?
This goes to the heart of what caused the financial crisis. The settlement is resolving claims that JPMorgan Chase (and two firms it later purchased, Washington Mutual and Bear Stearns) sold Residential Mortgage-Backed Securities when it knew the underlying mortgages were troubled.
It was these toxic securities that infiltrated the global economy and then turned sour, taking the financial system with them. JPMorgan Chase did not formally admit to guilt (which would have placed the bank in even more serious regulatory and legal jeopardy) but did agree to a statement of facts outlining severe malfeasance in the run-up to the crisis. Specifically, the statement of facts outlines how, on multiple occasions, bank employees knew that the underlying mortgages were not appropriate for securitization but allowed it anyway and never told the investors who were making the purchase.
Getting at this misconduct was the reason the Residential Mortgage-Backed Securities task force was formed. “Since my first day in office, I have insisted that there must be accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy,” said Attorney General Schneiderman, co-chair of the RMBS group. “We won a major victory today in the fight to hold those who caused the financial crisis accountable.”
How much is JPMorgan Chase paying, and where does the money go?
The settlement is for $13 billion—the largest sum a single company has ever paid the US government, more than tripling the previous mark, which was the $4 billion BP paid the government for the Deepwater Horizon spill. Thirteen billion dollars also represents half of JPMorgan Chase’s annual profits.
Nine billion of that goes to settle claims brought by various regulatory agencies and states over claims related to RMBS. Specifically, JPMorgan will pay $2 billion as a civil penalty to settle the Justice Department claims under the Financial Institutions Reform, Recovery, and Enforcement Act; $1.4 billion to settle federal and state securities claims by the National Credit Union Administration; $515.4 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation; $4 billion to settle federal and state claims by the Federal Housing Finance Agency; $298.9 million to settle claims by the State of California; $19.7 million to settle claims by the State of Delaware; $100 million to settle claims by the State of Illinois; $34.4 million to settle claims by the Commonwealth of Massachusetts; and $613.8 million to settle claims by the State of New York.
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The remaining $4 billion must go to distressed homeowners. Half of it will come in the form of principal reduction—where the amount owed on distressed mortgages is reduced—and the rest will go towards refinancing mortgages at better rates, donation of bank-owned properties to nonprofits or Land Banks, new mortgages to low- and moderate-income families hurt by the financial crisis, and below-market loans to some people who had their homes destroyed by Hurricane Sandy.
Why is the deal important?
In January 2011, this deal didn’t seem possible. The looming National Mortgage Settlement was heavily rumored to include immunity and indemnification to all involved banks for all conduct related to the crisis. But a strong progressive pushback led to immunity’s being stripped from the deal and to the creation of the RMBS task force, which brokered this settlement.
And more prosecutions are possible—Attorney General Eric Holder was explicit on that point Tuesday. “Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” he said. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior. The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over. No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.”
While there is plenty to criticize in this settlement (more on this next), it’s important to note some ways in which the federal government refused to be pushed around by JPMorgan. As The New York Times reports today, CEO Jamie Dimon tried to settle for just $3 billion, but DoJ officials refused to even meet with him. Only when the amount was dramatically raised did a meeting occur.
JPMorgan also wanted the FDIC to indemnify it for misconduct related to Washington Mutual, and that request was denied. It also wanted immunity from an ongoing criminal investigation in California related to RMBS—that was also denied. These sticking points delayed finalization of the deal for weeks, but JPMorgan ultimately had to relent.
What are critics saying?
There are many strong criticisms of this settlement, however. The central one is that no actual bank executives were charged—despite the fact that the Justice Department clearly established a pattern of misconduct at many different levels of the bank. “The bottom line is that there’s continued reliance on the immaculate conception theory—that no people were actually involved,” Bartlett Naylor, a financial policy advocate with Public Citizen, told The Nation.
Naylor, who served as chief of investigations for the Senate Banking Committee during the Savings & Loan crisis—where more than 800 bank officials went to jail—said such prosecutions are crucial because they create a true disincentive to bad behavior on Wall Street, as opposed to a fine, even a substantial one, that will essentially be paid by investors.
“Now, the price [for malfeasance] is you have negotiations with the government and you suffer some embarrassment, some negative press, but it’s the price of business,” Naylor said. “This shouldn’t be the price of business—this is something beyond just present value of future earnings. This is about morality. This is about the fabric of our society. We’re financializing our economy. We’re becoming increasingly an economy about banking. And lawlessness.”
Last week, US District Judge Jed S. Rakoff penned an op-ed excoriating the Justice Department for failing to charge a single high-level bank executive in relation to the crash, despite ample evidence of wrongdoing. This isn’t some random activist, but rather a senior judge in the Southern District of New York who is intimately familiar with prosecutions of the financial industry. When he’s concerned, everyone should be.
The other main criticism is that JPMorgan Chase will end up paying much less than $13 billion in the end. Only $2 billion applies to after-tax profits, meaning the rest can be accounted as a loss—so after taxes, it will cost the bank less than $9 billion. Many people have noted that the homeowner relief “penalties” in the settlement are for things the bank is already doing anyway, like extending payment schedules for troubled mortgages, extinguishing badly troubled second-tier loans and donating distressed properties to nonprofits.
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