Erring big US banks settle cases through fines

Coincidental with the cliff-hanging negotiations in Washington, which ended on October 17 with the Obama administration defeating the House of Representatives in their standoff on funding the federal government and raising its borrowing limit, was another deal-making that settled the legal and regulatory woes of the United States’ biggest bank.

The bank: JPMorgan Chase (2012 assets, $2.509 trillion; net income, $21.3 billion).

Cases: several civil-fraud charges, plus a criminal-case investigation, on the bank’s selling of “troubled” mortgage securities before the 2008 global financial-economic crisis.

Settlement: a $13-billion fine on the civil-fraud charges, with the criminal-case inquiry allowed to play out (it could entail additional fines and stricter monitoring of JPMorgan operations).

The deal, sealed last Oct. 18, was personally negotiated by Jamie Dimon, JPMorgan chairman and chief executive, with Attorney General (Justice Secretary) Eric Holder Jr. 

Although Dimon headed the bank when the wrongdoings were committed — and normally would have been held accountable -- he has retained his twin posts, fully supported by the board and the shareholders.

Such deal-making accords with how the US government has handled the cases of the big banks, whose malpractices triggered the financial crisis, by bailing them out because they are deemed “too big to fail.”   As Reuters columnist James Saft commented in the International New York Times:

“If you are a too-big-to-fail bank like JPMorgan you get special privileges: a borrowing rate subsidized by an implied government guarantee and the confidence of knowing that as your downfall would sow havoc, you are immune to the ultimate sanction.”  Dimon, Saft added, “did not make this world; he is just playing by its rules.”

The $13-B fine is the biggest so far for any erring bank.  Yet, since 2010 JPMorgan has set aside $28B for anticipated litigation costs.    According to the INYT, the bank’s legal bills have run up as follows:

• November 2012:  $297M settlement with the Securities and Exchange Commission on the sale of troubled mortgage securities;

• January 2013: $8.5B settlement on allegations of abuses in foreclosure practices during the 2007 housing crisis;

• July 2013: $410M settlement with the energy regulator on “manipulative schemes” to transform “money-losing power plants into powerful profit centers;”

• September 2013: $80M to resolve claims that it charged credit-card customers for services they had not received;

• September 2013: $920M to resolve claims in the US and United Kingdom that it allowed a group of traders to accumulate losses in billions of dollars.

 Earlier in 2003, JPMorgan and 9 other Wall Street firms paid $1.4B to settle charges involving conflict of interest between stock analysts and investment bankers, John Cassidy noted in a commentary posted on the New Yorker website.  He cited these other banking-case settlements:

• In 2010, Goldman Sachs paid $550M to settle the Fabrice Tourre case with the SEC, a charge that it had conspired with “hedge-fund titan” John Paulson to mislead investors in a “CDO offering;”

• In June 2011, Bank of America paid $8.5B to a group of investors and the Federal Reserve Bank of New York that bought questionable subprime securities built from home loans issued by Countrywide Financial, which BA had acquired in 2008;

• In February 2012, five of the biggest mortgage-service companies  – BA, JPMorgan, Citigroup, Wells Fargo, and Ally Bank – agreed to pay a $25-B settlement with state and federal regulators on charges of inflating fees, robo-signing foreclosure documents, and “multiple other improprieties” during the housing boom and bust; and

• Earlier this year, JPMorgan and BA agreed to pay $9.3B to settle other cases brought forward by federal regulators.

 The latest $13-B fine is expected to be allocated this way:

 1. $6B to compensate investors who suffered losses from buying mortage securities from JPMorgan and from Bear Stearns and Washington Mutual, both previously acquired by the bank with the US government’s support;

2. $4B for relief of struggling homeowners in Detroit and other cities from buying the “shoddy” mortgage securities that JPMorgan sold to Fannie Mae and Freddie Mae (government housing agencies); and

3. $3B as fine for JPMorgan’s general mortgage practices found afoul of regulations.

“We seem to have stumbled into a new form of corporate regulation, in which nobody in the executive suite is held personally accountable for wrongdoing,” Cassidy observed, “but the corporation and its stockholders are periodically socked with huge fines for past abuses.  Such a system isn’t necessarily anathema to CEOs, such as Dimon, who don’t lose their jobs or land in court or see their corporate fiefdoms broken up.”

This trend may be “better than having no accountability at all,” he added, “but it is people, not corporate abstractions that break the law.  And it is people at the top of the corporations who set the rules for everybody else to follow.”

Unless this reality was recognized, Cassidy averred, “simply lumping corporations with big fines years after the fact (wouldn’t) necessarily make much difference in how they behave.”  He batted for more severe government sanctions.

Reuters’ Saft concurred. If the too-big-to-fail policy ever ended, he conjectured, “Mr. Holder, Mr. Dimon and investors (would) all quickly change their behavior.” 

I doubt if that will happen.

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