A Pox on Both Your Houses

What is the ultimate outcome of the year long pillorying of JP Morgan by various elements of the Justice Department as well as various States Attorney Generals The shareholders lost considerable equity in JPM that will be dispensed over a number of years as fines, restitution and community rebuilding efforts. Perhaps, more importantly, a long standing critic of Federal regulatory policies in the finance sector, Jamie Dimon, Chairman of JPM, has been appropriately chastised. Appropriately, is a term worthy of a readers thoughtfulness! If the object lesson that the Department of Justice wished to teach was, dont tread on me, Mr. Dimon certainly got the message. Undoubtedly, he and other leaders of financial firms in the US will draw a different lesson: dont buy besmirched goods from a government agency. The Office of Thrift Supervision (who originally closed down Washington Mutual) and the FDIC (who took over WAMU as a receiver and sold WAMU to JPM) is now on notice as well. They should not plan to sell received assets to financial institutions in the future without explicit warranties and representations. In the long run, since banks and S&Ls and Thrifts do fail now and then, this may be the most significant outcome. An unintended consequence of the DoJs pursuit of JPM (and other financial institutions engaged in the mortgage re-packaging business) Surely!

What about the other losers in this game Financial institutions that still have large balance sheets (such as the Bank of America and other large banks that had packaged and sold RMBS in the Credit Boom), are now on notice that large settlements are to be expected. Since JPM has already docked its own shareholders, the remaining institutions that need to settle with the DoJ will have ample precedent to do the same to their own shareholders. The market seems to have the opinion that getting it behind the firm lifts stock prices. Maybe the penalties had already been discounted

Who escaped from this debacle Clearly, senior executives at JPM and of course, the untouchables who are or were Directors of JPM. They have been assessed no penalty, but it is suspected that there will be some criminal prosecutions of those in the prior chain of command that supervised or promoted these securities. In addition, there is no guarantee that the Plaintiff Bar might not yet get involved and attempt to extract its pound of flesh from said executives and directors, as was done in the infamous Enron and WorldCom cases. Stay tuned. The Fat Lady has yet to sing.

What about the various agencies of government who promoted and subsidized the notion that our democracy was immensely improved by making homeowners out of renters or allowing those with dubious credit to indulge their acquisition of larger homes at effectively subsidized rates For years, Congressional representatives indulged in a do good act with regard to housing. The Rubicon was the CRA of 1994 that threatened banks with a charter loss if they were found to be discriminatory in their mortgage activities. And, what about those favored sons of yore, the US Government guarantee twins, Fannie and Freddie. Both got into subprime guarantees in a very big way. Ultimately, the prospective losses on this paper put them into conservatorships. Quantitative easing has created some windfall profits for the Agenciesand these profits are now being remitted back to the Government. There was plenty of sin to go around during the Credit Boom that preceded our financial crack-up.

What should be obvious to any observer who gets beyond the greed and hubris charges levied at bankers of the boom is that government supported many aspects of the Credit Boom, until it all went smash and government intervened to pick up the pieces. The JPM settlement has provided a massive fig leaf for the regulatory folks in Washington and in State Capitols who ignored the obvious as long as extensive credit went to the 99%. The system fell apart not because of faulty regulation, inadequate regulation, and inadequate enforcement of already extant regulations. It fell apart because of greedy bankers. That narrative might be faulty economics, but this Administration revels in its politics. Not only did the settlement provide a fig leaf, it now promises to enhance government credibility by spreading around some $4 billion to various consumers and to politically active community organizations who get to feast on some of the JPM-provided largess. Lets hear it for the shareholders who will provide community organizers with riches they never expected!

In the run-up to the settlement, two items need address. The first is the tactics used: the DoJs threat to levy a criminal indictment against JPM. The Statement of Facts that JPM and the DoJ allowed to be part of the settlement doesnt include a criminal confession. We thought that was a bridge too far and said so. (See
The Punishment Puzzle: whos the Fish in this game at DisorganizedCrimes.net). In order to arrive at this outcome, JPM threw in some several billions more in the settlement and the Government was made to see that cash beats threats of criminal indictment. It is not so hard to up the ante when you are using other peoples money. It is an open question of how far the Government can and may go to force settlements with the threat of criminal indictments, but previously mentioned candidates such as the Bank of America will certainly pay close attention to what it costs to escape the wrath of the Department of Justice.

We have termed this the Punishment Cycle. The massive size of the JPM settlement forcefully argues that it is expensive, maybe even impossible, to ward off a Government intent on revenge. None of these Star Chamber proceedings are evidence of a government of law. Instead, we have a government of men not particularly bound by constitutional compunctions. It is not a pretty picture for limits on government intervention in the near future.

This melodrama is not yet over. The final curtain on Punishment has not come down. We are still waiting for the Fat Lady to sing her closing aria.

See the WSJ article for references to what was suppose to be in the settlement agreement between JPM and the Government on the web at: http://online.wsj.com/public/resources/documents/111913jpmstatement.pdf