Scratching my head over that $13 billion settlement

I’m confused by the reports that JP Morgan is close to settling most of the claims against the bank by the federal government in return for a payment of $13,000,000,000.

On one hand…

There are several parts of the long list of Morgan scandals that fully justify punishment, in my opinion. Consider manipulating Libor or prices in the energy market as just two examples.

Since the options of either public flogging or liberal application of feathers preceded by tar are not possible with a corporation, a decent fine would be a good start.

Some individual accountability, just as a with some felony conviction with and short jail term would be good too. The individuals manipulating energy walked. We don’t know yet about the Libor manipulators.

On the other hand…

I don’t quite understand why JPM is paying a fine for actions by Bear Stearns and Washington Mutual for actions taken before those banks were purchased by JPM during the financial crisis. Those acquisitions were pushed by the federal government to keep the banks from failing and causing more turmoil. So, after helping out, JPM pays a fine for helping out.

Also, as I’ve discussed in various places on my blogs, several parts of the federal government ought to get a large share of the blame for the ’08 financial crisis.

One small part of that concept, with a condensed explanation, is that Congress required Fannie and Freddie to generate home loans to people who couldn’t afford it. They in turn pushed originators to fund loans that wouldn’t have been funded a decade earlier.

Now we are supposed to believe that FNMA and FHLMC were innocent by-standers? I don’t think so. But JPM has to settle up with them, with said settlement reportedly at $4B.

The reported settlement

The Wall Street Journal reports the framework of the settlement: Record Pact Is on the Table, but J.P. Morgan Faces Fight

Current form would include $4M to Fannie and Freddie, $4B in consumer relief (to be distributed as the feds decide), and $5B in fines.

The amounts involved started at $1B early this summer and grew as negotiations continued and additional issues were included in the settlement, according to the article.

Richard Parsons, former EVP of BofA, said this settlement is Sending a Bad Message to Big Banks.

He explains that large banks frequently step in to acquire failing banks, which acquisitions help resolve a particular crisis. The extent of efforts to acquire collapsing institutions is illustrated thus:

Thirty of what were the 50 largest banks in the country in 1980 are now part of Bank of America, Wells Fargo and J.P. Morgan Chase. These three banks are large in part because of their willingness and consistent ability to help bank supervisors calm local and global financial markets—to become part of the solution when the financial system was in danger.

He thinks there will be severe unintended consequences to punishing JPM for helping out this time:

If it is true that J.P. Morgan Chase must pay penalties for mistakes made by Bear Stearns—a firm that Washington encouraged them to take over—then it is likely federal policy makers have actually increased systemic risk to the financial system.


Once the government proves itself to be an unreliable “partner” in resolving failed institutions, it will find fewer banks willing to step in next time there is systemic risk to the banking system.

Punishment or shakedown?

The WSJ editorial on the same day suggests this is The Morgan Shakedown.

I don’t agree with that description but I’m still confused.

The editorial makes the point that JPM is now being penalized for banks it acquired at federal request. It also points out that Fannie and Freddie aren’t innocent waifs begging on the corner who got cheated by those big, bad, meanie bankers:

But everyone knows that Fan and Fred had as their explicit policy the purchase of securities for liar loans and subprime mortgages to further their affordable-housing goals. Those goals went far to create the crisis, but now these wards of the state are portraying themselves as victims.

The editorial points out we need to watch where the $4B of consumer relief goes. Will it go to the purchasers of those so-called bad loans, which is where any damage would have been from mislabeled loans? Or will it be handed out haphazardly to the underwater homeowners or advocacy groups?

If we really want to go after the full list of perps, the WSJ extends the list of who the Justice Department should investigate:

The real lesson of the Morgan settlement isn’t that justice has finally been done to the perpetrators of the crisis. That would require arresting Barney Frank and those in Congress who blocked the reform of Fannie and Freddie, plus the Federal Reserve governors who created so much easy credit.

Or crony capitalism theater?

Russ Roberts has a completely different perspective: Hard cop. For now. Until next time.

Here’s the current mess in the hard cop / soft cop analogy:

So is “the government” too tough on the investment banks or too easy? Both. That’s the beauty of the system as it is currently constituted. The government is the soft cop who lets you off for driving under the influence and even gives you gas money. But the government is also the hard cop who gives you a bit of a beating just to show the people that everyone has to obey the law.

Making-up-the-rules-as-you-go is a bit more scary, I think:

Some parts of the government are too tough on the banks–imposing ad hoc penalties that are a violation of the rule of law. Other parts are too easy–making sure creditors get rescued so the big banks can keep borrowing. Or letting them call themselves regular banks so they can borrow money from the Fed.

Prof. Roberts calls it theater:

I think the Journal misses the main point. This penalty for JP Morgan isn’t a new era of getting tough on the banks to please the left. It’s part of the whole charade. It’s like when the cop pretends to beat up the informer so the real criminals will think the informer isn’t an informer. It’s the equivalent of theater.

He closes by saying this time the government is pushing the banks around. Other times, the big banks push the government around.

I’m still scratching my head trying to sort this all out.

One option with increasing appeal to me, as suggested by the professor:

It’s just a dance that’s all. A pox on both dancers.

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