Wall Street exploded last week after news that J.P. Morgan Chase (JPM) had reportedly agreed to a $13 billion settlement over its sale of questionable mortgage backed securities prior to the crash of the housing market. Or rather, the sale of questionable mortgage-backed securities by J.P. Morgan, Bear Stearns, and Washington Mutual. Many are furious, labeling this a government shake down of the worst order, a move to placate hand-wringing liberals who need to see someone pay for the housing crash. A pound of flesh for the left, whether the extractee is really the one responsible or not.
Still others see it as being a crucial punishment to one of the worst violators, one that can help demonstrate to the big banks that the post-Dodd Frank world is one where there are consequences. If the only thing the big banks care about is profit, taking away half a year's worth could speak pretty loudly.
But is it fair? Is this wrank, opportunistic politics or solid public policy? How you answer that question may end up having more to do with one's politics than anything else, but it's still worth taking a look at what happened and what it could mean.
An Expensive Favor?
The day it was announced that Dimon had reached a verbal agreement with Eric Holder on the sum of the settlement, the Wall Street Journal published a scathing editorial that summed up most of the negative sentiment sent swirling through the financial sector. The opening salvo provides a pretty clear sense of the tone the piece would take:
"The tentative $13 billion settlement that the Justice Department appears to be extracting from J.P. Morgan Chase 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."
From there, the piece went on to assert that J.P. Morgan bought up Bear Stearns and Washington Mutual as a favor to the government, taking on two toxic assets because and saving the American economy from total collapse while being pressured by the feds. It also repeats the popular refrain among some conservatives that it was Freddie Mac and Fannie Mae that put in motion the market forces that led to the housing bubble itself by buying up subprime mortgages, saying "We are supposed to believe that the bank misled the two mortgage giants about the quality of the mortgage securities they were issuing. 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."
Just how much of the blame for the housing bubble should be ascribed to Fannie and Freddie as opposed to, say, major banks like J.P. Morgan is likely to be an ideological debate that will rage on among historians and economists alike for decades (if not centuries), so it's certainly not out of bounds for the Journal to make that claim. And it's probably not worth digging into here. However, the issue of Bear Stearns and Washington Mutual is an interesting question.
It's not easy to completely unpack what happened in 2008 when J.P. Morgan purchased the crashing Bear Stearns and Washington Mutual. It's clear that conservatives like those on the editorial board at the Wall Street Journal seem to believe that the decision was not a business one. Essentially, they would have us believe that J.P. Morgan's decision to buy up the two ailing institutions was a noble one. And it's not far off, shoring up Bear Stearns and WaMu was an important step towards preventing total collapse of the economy, and J.P. Morgan ended up proving a key player in that relative success.
However, the idea that J.P. Morgan failed to benefit from purchasing Bear Stearns and Washington Mutual is one that's standing on legs that are at least a little shaky from the logical stand-point. Many, at the time, viewed J.P. Morgan's move as being coldly opportunistic. One of the all-time brilliant value plays, a solid asset grabbed at a rock-bottom price because Jamie Dimon kept his head when everyone else was busy covered their rears. As Warren Buffett once said, "Be fearful when others are greedy and greedy when others are fearful."
And if J.P. Morgan's initial estimates hold true, the acquisition of Bear Stearns and Washington Mutual has produced some $16 billion in profits since 2008, which would mean that the $13 billion settlement was already paid for. What's more, the idea that J.P. Morgan didn't thoroughly vet this deal ahead of time is probably a flawed one. It's entirely possible that Dimon and company had even anticipated these liabilities when acquiring the company.
No Easy Answer
In the end, the question of fairness isn't one that's just never going to have a clear answer. On the one hand, J.P. Morgan most likely profited from buying up Bear Stearns and Washington Mutual. What's more, they were guilty of selling questionable securities themselves. If the punitive action taken by the government falls short, lacks the necessary meaning, isn't it like giving the major banks a free pass for crashing the entire economy? And lets also not forget the $25 billion in federal bailout money J.P. Morgan helped itself to.
But, on the other hand, J.P. Morgan's decision to take on Bear and WaMu was clearly one that benefited the country, whether it also benefited J.P. Morgan or not. If, God forbid, the country should find itself in a similar situation in the future, is it possible that the memory of Eric Holder and the Obama administration burning one of the only players that worked to help the country out will keep anyone from stepping up? And the fact that Fannie Mae and Freddie Mac's stated goal was to purchase subprime loans and securitize them remains a factor. Is it fair for the goverment to create an entity tasked with buying up assets like these, then suing a bank for billions because it sold those assets to them?
In the end, like most pieces of the housing crash, a clean answer is probably not forthcoming. But for the near term, it's J.P. Morgan's shareholders who are suffering.
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