This week, the financial media has been up in arms about the record $13 billion fine levied on JPMorgan Chase & Co. (NYSE: JPM) for its connection with mortgage-backed securities.
While some voices have called for Chief Executive Officer (CEO) Jamie Dimon’s departure from the bank, defendants have stated that JPM was a victim of government pressures to purchase Washington Mutual and Bear Stearns in 2008. Both acquired companies were responsible for 80% of the liabilities within this settlement.
CNBC talking heads argued that the government had engaged in a shakedown of Dimon, the pseudo-folk hero to emerge from the financial crisis.
In September, CNBC’s Maria Bartiromo went far off the deep end – and then dug a hole beneath the pool concrete – to defend the company. She stated that “JPMorgan remains one of the best, if not the best performing major bank in the world today,” before citing the company’s profits, near-record stock prices, and accusing an opposing view of lying about the bank’s well-documented actions in China.
Then The Wall Street Journal publishedthis a few days ago: The JPMorgan settlement “needs to be understood as a watershed moment in American capitalism. 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.”
JPM very well may be a great performing bank. But at the same time, it’s emerging as one of the most troublesome businesses in America over the last six years for its ethical boundaries.
I’m convinced that the events that have transpired with regard to JPMorgan are the result of something bigger than a shakedown – like JPMorgan’s repeated, alleged behavior. [More on that key word “alleged” in a bit.]
In fact, by doing a modicum of research, this $13 billion settlement doesn’t look to me like an anti-capitalist shakedown at all.
Instead, it’s a reminder of what’s going wrong with Wall Street, and how we should proceed moving forward…
What Business Journalists Can’t Forget…
An important part of this story comes from day 4 of the average Business Law class, when students learn about assets and liabilities.
When a company buys another company, the purchaser assumes all assets and liabilities of the target, whether they are known or unknown at the time. When a company is sold, the purchaser doesn’t get to pretend that any past actions suddenly disappear.
JPMorgan recognized there were risks in buying Bear Stearns and Washington Mutual.
In fact, the company set aside $28 billion starting in 2010 in order to address potential liabilities from the purchase.
But it wasn’t the government who held a gun to Dimon’s head and made him do the deal…
According to Andrew Ross Sorkin’s (who, ironically, works with Bartiromo at CNBC) “Too Big to Fail” – the definitive book on the financial crisis – Dimon was eager to pay $10 a share for the company from an original offer of $2. Hank Paulson, however, who was willing to have the government pay $29 billion of Bear’s worst assets, was eager to let JPMorgan have the company for far less.
That said, JPMorgan got a deal on a dying company. And JPM prepared itself accordingly by setting aside money for litigation after the acquisitions.
It just so happened that the House of Morgan was allegedly engaging in the same sort of unethical behavior as the two companies it had purchased.
But that’s not all it was doing…
Shakedown Street: Used to be the Heart of Town
As Money Morning reported this week, the $13 billion suit is the 11th settlement that I dug up on JPMorgan in the last two and a half years alone.[Fun fact: Each settlement is tax deductible, with the recent $13 billion deal likely to only cost the company $9 billion after filing.]
The company has paid billions to settle suits in which its traders or salespeople were allegedly misleading investors, rigging interest rates, and illegally foreclosing houses. And in many of the settlements, it paid a fine and did not have to admit guilt.
That means every journalist must write the word “allegedly” to describe JPM’s actions or face lawyers (many of whom likely either used to work or will one day work in the halls of the Department of Justice, the U.S. Commodity Futures Trading Commission, the Federal Energy Regulatory Commission, or the U.S. Securities and Exchange Commission.)
Usually, I detest government regulation and the proliferation of government alphabet soup agencies prying into private business. But when you dig into the complexity of modern finance and couple it with the behavior of certain financiers, you start to understand why it’s become a staple of society.
Only in the banking sector could there possibly be a need to prevent companies from rigging electricity rates and local bond sales, while a group in the financial media rallies around these “business decisions” as “rational” behavior and the hard knocks of American capitalism.
When Alan Greenspan admitted on The Daily Show this week that one of his biggest mistakes was underestimating the irrationality of human beings during the financial crisis, he should look at what JPMorgan – a bank where he once served as a corporate director – has become.
JPM paid an $88.3 million civil penalty for allegedly violating economic sanctions by engaging in trade with individuals and companies with business ties to Iran, Cuba, Sudan, and Liberia.
Then not long after that, someone discovered that JPM was allegedly hiring the children of Communist Party officials in order to improve its business in China.
Yes, what JPM does is profitable. And some people clearly cheer for profits at all costs even when they undermine the beauty of the market system we had before financial oligarchs and a Federal Reserve System ran amok.
But Americans are tired of bailouts, Too Big To Fail, and hearing Wall Street fail to admit it did anything wrong.
In fact, bringing back regulation like the Glass-Steagall Act is something groups at extreme ends of the political spectrum actually agree upon. It’s just Americans don’t have that sort of lobbying power anymore.
But we need to try and preserve American capitalism from these companies.
The longer Wall Street keeps up this behavior, the more government will justify increasing regulation to other sectors and businesses – many of which don’t require the scrutiny that Wall Street now deserves.
Find out which Wall Street bank is likely to get hit with the next penalty: What the JPM Settlement Means for Wall Street
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