JPMorgan Got Off Easy: Why The Settlement Is Not Justice

The Justice Department, along with federal and state partners, announced this week a $13 billion settlement with JPMorgan - the largest settlement with a single entity in American history.  This settlement brings to a resolution the federal and state civil claims arising out of the packaging, marketing, sale and issuance of residential mortgage-backed securities (RMBS) by JPMorgan, Bear Stearns and Washington Mutual prior to Jan. 1, 2009.

I know that there are many politicians who are happy that the Justice Department settled with JP Morgan.   I am disappointed, though, with all the statements in the press release from the various District Attorneys who are claiming victory and that justice has finally been done.  It is ridiculous and it is politics as usual.  Am I alone here?  Have we lost our minds as a country?  How is this a day of celebration?  The fact that this settlement represents the largest settlement with a single entity in American history is irrelevant when you look at the size of the entity that is paying it.  It doesn't matter that the settlement  is the largest!  It is simply not enough.  This crisis was the greatest financial disaster in the history of America.  It was far more reaching and damaging to the US economy and the world than the Great Depression.  This is why this period in our history is called the Great Financial Crisis. But you wouldn’t know it by looking at the top banks in the world, since the top ten largest banks globally have combined assets that total $25.5 trillion.

JPMorgan Chase, our current defendant, stands at #8 on the list, with $2.65 trillion in assets and a market cap of $209.54 billion.  Are we really calling this justice?  $13 billion is .64% of their assets and 6% of their market cap.   This is not real justice.  It’s just a bad day at the office, since the fine is barely equivalent to two quarters of earnings for them. This is a bank that earns $6.5 billion a quarter on an income of $25 billion per quarter, on average.  Last quarter their earnings were only $4 million of $5 billion in revenue. Also worth mentioning is that the bank has been running at a quarterly clip of $25 billion in revenue per quarter, but then all of a sudden fell down to $5 billion.  This serious drop in revenue would help explain the current layoffs.

Real justice, given the context of what has happened to our country, would involve the breakup or downsizing of Chase and criminal charges filed against all the participants in the fraud.  Families have lost their homes, the job market has been decimated, countless bankruptcies have been filed, and families have been broken up.  A fine of only $13 billion hardly seems like a punishment that would fit the crime.  A fine short of $1 trillion dollars will not send a real message and provide real help to the people who have been affected.

Unfortunately, the government is acting like we need Chase.  We do not need Chase, Bank of America, Citibank, Wells Fargo or PNC, who represent the top 5 US Banks.  If they all shut down tomorrow there are many smaller banks that would become midsize banks overnight.  We cannot allow Chase or any other bank to get away with the crime of the century by charging them fines that have little or no impact on the company.  In fact, I doubt if Chase’s stock price will be affected by the fine and penalties.  The stock will continue to rise like it has been all year because Wall Street will see that the conflict with the government is now over.

To make matters worse, the settlement reminds me of a class action lawsuit where only the attorneys are the ones getting paid.  We The People, the rightful claimants who have been impacted, are getting a few leftover pennies after the state and the attorneys get their shares.

Breakdown of the Settlement

$9 billion (70% of the $13 billion) to settle federal and state civil claims by various entities related to RMBS, as follows:

• $2 billion civil penalty to settle the Justice Department claims under FIRREA
• $1.4 billion to settle federal and state securities claims by NCUA
• $515.4 million to settle federal and state securities claims (FDIC)
• $4 billion to settle federal and state claims by FHFA
• $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
• $613.8 million to settle claims by the State of New York 

JPMorgan willpay out the remaining $4 billion in the form of varying relief aid such as:

• Principal forgiveness
• Loan modification
• Targeted originations
• Efforts to reduce blight

Sadly, the American people have been given 4 lousy billion dollars, and (get this) the banks are in charge of dispersing it.  It is like the Fox guarding the Hen house.  The banks are not forgiving principal like they should.  They are not approving modifications that make sense like they should.  They are not originating loans to target MSAs with low- to moderate-income borrowers (especially African-Americans and Hispanics) like they should.   They are doing very little to reduce blight, like they should.  Ironically, the bank programs to reduce blight consist of selling REOs in bulk to hedge funds so that they can say it’s now their problem.  This means that the very financial institutions who caused the problem are now the custodians of the American people’s $4 billion trusts, as it were.

To add salt to the wound, the Justice Department is going to appoint an independent monitor who will probably be a banker.  This independent monitor will be appointed to determine whether JPMorgan is satisfying its obligations.  If JPMorgan fails to live up to its agreement by Dec. 31, 2017, it must pay liquidated damages in the amount of the shortfall to NeighborWorks America, a non-profit organization and “leader in providing affordable housing and facilitating community development.” 

I am having difficulty understanding NeighborWorks America’s involvement in the settlement.  Whose idea was this?  Why should they be involved?  What kind of penalty is this for defaulting on a judgment/settlement?  If Chase fails to live up to the settlement are they not in contempt of a court order?  The judge should triple the damages and make Chase honor the settlement they have made to the American people.  It is a good thing that Chase is not a minority-owned bank or doesn’t have a minority CEO.  I can assure you that would not have been the deal on the table.  In fact, I am not sure if there would have been a settlement.  This case would have gone to trial.

How didNeighborWorks become part of a federal settlement and become the fall back plan to a bank that may just tell the DA’s and the American people, “Forget justice, we are not doing any of it!”  If NeighborWorks needs money they have plenty of grant writers and members of Congress that can make the request.  But this is not the way to supplement their fundraising activities. It makes me wonder who is really benefiting from this very unusual condition in the settlement.  Think about it.  The largest settlement by a single entity in the history of America and NeighborWorks, a non-profit, is a strategic partner with the Justice Department if the banks default on the obligations?  Are you kidding me?  And how would that work?  Would NeighborWorks make principal reduction on mortgage loans on the bank’s behalf, or make loans or modify loans for borrowers on the bank’s behalf?  Was this worked out in the Judge’s chambers or in open court?  I can just imagine them all sitting around after a long day of arguing, and someone saying, “Hey, what if Chase doesn’t keep the deal?  What should happen?”  

This was not a good settlement for the American people.   Settlements or plea bargains are rarely equitable for the plaintiff and typically benefit the defendant. It’s like a murderer who plea bargains for life without parole instead of the death penalty, and the parents of the deceased get a token of justice.  The defendant in this case has gotten away with the crime of the century and will probably do it again.  The Attorney General Eric Holder said the following:  “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.  I want to personally thank the RMBS Working Group for its tireless work not only in this case, but also in the investigations that remain ongoing.”

Mr. Holder, it does matter how profitable they are and it does matter how long it takes and it does matter that we send a very clear message to all banks that this cannot and will not be tolerated.   We “the people” have failed here miserably.  We failed with a measly $25 billion settlement in California that our Attorney General is bragging about, and we are failing here.  This settlement is a slap in the face to the American people and a drop in the bucket to JP Morgan.  JP Morgan knowingly bundled toxic loans and sold them to unsuspecting investors.  Knowingly originated bad loans to unsuspecting borrowers and knowingly foreclosed indiscriminately instead of reducing principle and making it right.  It took the California Bill of Rights and similar legislation across the nation to stop these banks, and they are also settling instead of going to court and getting real justice for the American people.  The CEOs of most of these banks still have their jobs and houses.  They continue to march forward with self-righteous indignation that “the American people” have the audacity to ask for principle reduction, because the note is the holy grail of the mortgage industry and the secondary market and cannot be compromised even by law.

This settlement does not represent justice for the American people.  It is a shame and it appears that our DA’s across the country are more concerned about moving on, claiming a hollow victory for themselves and not the American people. We have corruption at the highest levels in our banking system, Wall Street, and our judicial system because of politics, and the rapid moral decay of our society that is taking us down a path that we may not be able to change.  May God bless America before it’s too late and we arrive at our very uncertain destination.

http://www.justice.gov/opa/pr/2013/November/13-ag-1237.html

http://www.housingwire.com/articles/28040-jpm-stock-finishes-higher-after-13b-rmbs-settlement