JPMorgan: Wall Street’s Not Saying It’s Guilty. It’s Not Even Sorry

For the big banks, cutting penalty deals without admitting wrongdoing is just a cost of doing business.

JPMorgan Chase & Co Chairman and CEO Jamie Dimon testifies before the House Financial Services Committee on Capitol Hill June 19, 2012 in Washington, DC.
National Journal
Michael Hirsh
Oct. 21, 2013, 12:28 p.m.

Over the week­end JP­Mor­gan Chase, the world’s largest bank, re­portedly agreed to fork over $13 bil­lion in what will be the world’s largest cor­por­ate set­tle­ment. Al­though the pen­alty, in pro­por­tion to JP­Mor­gan’s multi-tril­lion-dol­lar bal­ance sheet, will merely dampen its an­nu­al earn­ings, some com­ment­at­ors said they felt bad for CEO Jam­ie Di­mon. Call­ing the not-yet-an­nounced agree­ment a “shake­down,” the Wall Street Journ­al opined:  “Fed­er­al law en­for­cers are con­fis­cat­ing roughly half of a com­pany’s an­nu­al earn­ings for no oth­er reas­on than be­cause they can and be­cause they want to ap­pease their left-wing pop­u­list al­lies.” The Wash­ing­ton Post, lament­ing the “per­se­cu­tion” of Mor­gan, quibbled that the Justice De­part­ment should not be so “back­ward-look­ing” as to slap the bank “for al­legedly mis­lead­ing in­vestors about the qual­ity of [subprime] se­cur­it­ies it mar­keted be­fore the crash.” After all, the ed­it­ors said,  “roughly 70”‰per­cent of the se­cur­it­ies at is­sue were con­cocted not by JP­Mor­gan but by two in­sti­tu­tions, Bear Ste­arns and Wash­ing­ton Mu­tu­al, that it ac­quired in 2008” un­der gov­ern­ment pres­sure.

Poor Jam­ie. We do feel his pain. But all this em­pathy misses the point. What the his­tor­ic deal demon­strates, bey­ond any reas­on­able doubt, is that the biggest banks are so big today that al­most no wrong­do­ing can threaten their ex­ist­ence. They have be­come, in ef­fect, something close to sov­er­eign powers. Yes, if you’re a big­ger power, like the United States, you can ex­tract “trib­ute” from them oc­ca­sion­ally, as the Ro­mans used to do to vas­sal states. But you don’t li­quid­ate sov­er­eign powers or put their of­fi­cials in jail.

Con­sider the odd spec­tacle of Di­mon reach­ing out like a po­tentate to Eric Hold­er, ask­ing for a per­son­al meet­ing in which the two of them could hash out the pen­alty in private. The head of a bank and the at­tor­ney gen­er­al of the United States held, in oth­er words, a kind of per­son­al “sum­mit” meet­ing. Such a pact would only have been pos­sible if the gov­ern­ment of the United States is it­self afraid of dis­turb­ing the op­er­a­tions of the bank — and in fact Hold­er ad­mit­ted just that back in March when he warned that the biggest banks have grown not only too big to fail, but too big to pro­sec­ute. (In testi­mony be­fore the Sen­ate Ju­di­ciary Com­mit­tee, Hold­er de­livered an im­pli­cit re­buke to his former Cab­in­et col­league, Treas­ury Sec­ret­ary Timothy Geithner, who per­mit­ted Wall Street to re­sur­rect it­self in what is largely its former im­age.) 

As MIT fin­an­cial ex­pert Si­mon John­son, the former chief eco­nom­ist of the In­ter­na­tion­al Mon­et­ary Fund, ob­served, “If Di­mon’s bank didn’t have $4 tril­lion in as­sets (meas­ured us­ing in­ter­na­tion­al ac­count­ing stand­ards), but rather a much more mod­er­ate $250 bil­lion or $500 bil­lion, do you think he would have the same ac­cess?”

Di­mon is ap­par­ently tak­ing this deal as a large-scale cost of do­ing busi­ness, and he’s still fight­ing Justice’s de­mand that his bank ad­mit some culp­ab­il­ity or wrong­do­ing. Which is the same pat­tern we saw in pre­vi­ous cases with Gold­man Sachs and oth­ers: in one case, against Cit­ig­roup in 2011, U.S. Dis­trict Judge Jed Rakoff re­buked the Se­cur­it­ies and Ex­change Com­mis­sion and re­fused to ap­prove a $285 mil­lion set­tle­ment with the bank be­cause the SEC failed to gain any ad­mis­sion of wrong­do­ing or li­ab­il­ity. To his cred­it, Hold­er is re­portedly still pur­su­ing a crim­in­al case against JP­Mor­gan in­volving al­legedly fraud­u­lent mort­gages in Cali­for­nia; in pre­vi­ous in­stances, banks have suc­cess­fully bar­gained for the drop­ping of crim­in­al charges in ex­change for sub­stan­tial set­tle­ments.

But for those who are tut-tut­ting that poor JP­Mor­gan is giv­ing up some half its profits, con­sider these fig­ures from An­drew Haldane, head of the Bank of Eng­land’s fin­an­cial-sta­bil­ity de­part­ment. He wrote that the fin­an­cial crisis of 2008-09 pro­duced an out­put loss equi­val­ent to between $60 tril­lion and $200 tril­lion for the world eco­nomy. As­sum­ing that a fin­an­cial crisis oc­curs every 20 years, the sys­tem­ic levy needed to re­coup these crisis costs would be in ex­cess of $1.5 tril­lion per year, Haldane says. What that means is that over­all, our un­res­trained fin­an­cial sec­tor does not add any net be­ne­fit to the eco­nomy — its re­peated crises cost us far more than Wall Street brings to over­all eco­nom­ic growth.

JP­Mor­gan, in ef­fect, is giv­ing up what amounts to a me­di­um-sized pen­alty fee so that it can per­pet­rate Wall Street’s pat­tern of oc­ca­sion­ally blow­ing up and cost­ing the rest of so­ci­ety its pur­suit of hap­pi­ness. And des­pite cry­ing now that 70 per­cent of the bad mort­gages were ac­cu­mu­lated by Bear Ste­arns and Wash­ing­ton Mu­tu­al — which the gov­ern­ment pressed on Di­mon in the heat of the crisis — in fact he made out very well. “He got a ‘Jam­ie-deal’ on both Bear (the U.S. gov­ern­ment guar­an­teed $30 bil­lion of mort­gage as­sets) and WAMU (the FD­IC put WAMU in bank­ruptcy and let JP­Mor­gan buy it for pea­nuts),” says Jeff Con­naughton, au­thor of  the book “The Pay­off: Why Wall Street Al­ways Wins.” “So in some ways the fine is a be­lated in­crease in fair pur­chase price.”

Di­mon has of­ten be­haved like the lat­ter-day po­tentate he is.  In the years since the crash, no one has worked harder than Di­mon to re­sur­rect the de­bunked idea that Wall Street can reg­u­late it­self. He has pub­licly dis­paraged Paul Vol­ck­er, the le­gendary in­fla­tion-fight­ing Fed chief and name­sake of Pres­id­ent Obama’s still-un­im­ple­men­ted “Vol­ck­er Rule,” which pre­vents fed­er­ally in­sured banks from act­ing like risky hedge funds. Vol­ck­er has taken to telling audi­ences in re­cent years that the big, com­plex trades earn­ing bil­lions for firms like JP­Mor­gan Chase add little growth to the real eco­nomy, just as Haldane’s pa­per con­cludes. And des­pite the evid­ence that not a single Wall Street CEO really un­der­stood the trades that would doom his firm in the months lead­ing up to Septem­ber 2008, JP­Mor­gan and the oth­er glob­al banks have still sought to keep de­riv­at­ives and swaps trad­ing in the dark and out of reg­u­lat­ory con­trol as much as pos­sible, so as to keep their vast profit ma­chine (which re­lied on a lack of trans­par­ency) go­ing. 

The latest deal? Just the cost of do­ing busi­ness.

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