A distinct absence of news now seems to be occurring in the “chicken” game between the US Government and JP Morgan Chase (JPM). What seemed to be a settlement, waiting only the fill-in of the numbers and the JPM confession, now seems to be hung up. The absence of news is striking. Something is going on. What seemed to be a Punishment Cycle maybe evolving into determining who is Fish in this game.
For months, acting like the proverbial scorned woman, the Justice Department, in conjunction with the SEC, has been apologizing to the 99% for its prior years laxity in enforcementof US securities law by dishing out huge helpings of punishment to financial institutions that seemingly took advantage of the public on mortgages as well as for other financial crimes. Aside from currying favor with voters-to-be in 2014, to what purpose this activity is directed should be questioned. It is certainly not to protect the shareholders who must pay the bill for managerial mismanagement whatever the punishment. Nor can it be claimed that future corporate governance will be improved by such Government tactics.
The Punishment Puzzle
The financial press in recent weeks has gorged itself on estimating the size and form of punishment that the Justice Department-SEC would hand down to JP Morgan. Strangely, the hanging judges that run this Mugs Game have gone silent. What gives
Could it be that JPM has decided that the Fish at this table is the Government and is calling the Government’s bluff Suppose JPM has reasoned that in the current state of the Obama Administration’s many recent faux pas that putting the largest and most successful bank in the country out of business is not a politically savvy thing to do
The threat of a criminal prosecution is a mighty big club to coerce JPM into admitting it has broken the rules. But does it really make sense for JPM to subject itself to a posse of tort lawyers who will ride out to defend an endless line of “injured victims” that will surely ensue from a written JPM admission of guilt Or, has JPM finally decided that while it will pay a huge amount of shareholder equity to get beyond the Government’s punishment cycle, it will not really be able to resume its normal business if the plaintiff bar is allowed into the ring armed with a JPM confession. The news has gone quiet which suggests that the previous press conjectures that JPM will confess on the rack of this inquisition may not be so cut and dried.
JPM could be considering the possibility that the Obamaites are not so willing to take the unknown risk to the world’s financial system that would stem from a criminal indictment of JPM. JPM is not, after all, another Arthur Andersen. AA was put out if business for auditing defalcations, but there were other auditors in the wings ready to take over its former clients. A JPM collapse would not be just another Lehman! Lehmans bankruptcy was the start of the punishment cycle, and it was a disaster to the world economy. Is this Government willing to bring down a financial giant many times larger than Lehmans To put JPM in irons is a Samson-like outcome where the Philistines in the Temple make up the entire world’s financial structure.
The Obamaites have already upset the US health system, but sloppy IT in the health care system is child’s play in comparison to the consequences of bringing JPM to the ground. Maybe the risk department at JPM has figured out that the Government is bluffing after all Who’s the Fish in this game JPM management may be willing to spend a great deal of shareholder equity to get out the box, but perhaps it has decided to call the Government’s bluff by not signing a confession of guilt The outcome of this clash depends mightily on how arrogant and stupid this Government is at the end of the day! Man the lifeboats and pray for a rational response from the big G.
The Stakeholders In This Game
Who are the other stakeholders in this Punishment Game For the Obama Administration, it is the continuation of their campaign to persuade the public that this is an example of Main Street versus Wall Street.
One might think that the DOJ-SEC has fully mined this vein of political gold, but politicians like would be market players often overestimate their intelligence and underestimate the costs of being wrong. Some could argue that with the Affordable Care Act turning into a potential quagmire, this Administration needs a different scalp to show its supporters that it still has plenty of skin in the game.
What about the shareholders of JPM They are going to lose whatever the outcome. The losses will be worse if the Government decides to put JPM on the rack and pursue a criminal indictment, but the shareholders of JPM will just be one of the many injured by such tactics. Will this punishment improve corporate governance That is the most dubious of all claims.
Lastly, when one considers that similar tactics are being applied to Bank of America for mortgage-making at Countrywide, there is one other casualty: what bank will ever rescue the FDIC again if a major depository bank or S&L is about to fail Who wants to take delivery of a package with concealed damages that can threaten the existence of the putative rescuer The FDIC wants to escape the liability of putting Washington Mutual in the hands of JPM. JPM has said no. The Bank of America is faced with the same dilemma. It is an open question if they are willing to call the Government a Fish.
We left out one of the beneficiaries of this gigantic game of extortion: the innocents at Fannie and Freddy who for years were the insiders of Washington politics. They only made good loans, correct And, they were, also victims of shoddy mortgages, right Maybe the Administration can convince the public t overlook the fact their managers gladly gobbled up yield when they were a public company while their officers got paid in stock options for earnings gains. We have seen this movie before. Round up the usual suspects!