Over the weekend, it was reported that JPMorgan Chase had agreed to a $13 billion settlement over the sale of mortgage-backed securities during the credit boom. The tentative deal would settle charges that the bank, along with institutions it ultimately acquired in 2008—Bear Stearns and Washington Mutual—misrepresented the quality of loans that had been packaged into mortgage-backed securities.
This deal would be the biggest in a long series of settlements in recent years that have spurred the bank to push more and more cash into legal reserves. In the most recent quarter, the bank had to put so much aside to deal with legal problems that it wound up reporting a loss for the first time in years.
To a degree, we have become inured to these settlements. And inevitably, a certain degree of fatigue is settling in. At some point, can’t the regulators move on? In an editorial, The Washington Post fretted that the latest investigation was a “backward-looking attack” on the bank for the types of securities it sold in the boom era. In JPMorgan’s defense, the Post noted that “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.” Indeed, a common talking point among the company’s defenders is that it did the financial world, the government, and the whole economy a great service by wading in to save two troubled institutions—and that it is now being repaid by being dunned repeatedly for nine- and 10-figure sums.
This won’t do. As Dean Baker notes, while Bear Stearns and Washington Mutual were responsible for a lot of the mortgage misconduct, JPMorgan Chase concocted about 30 percent of the securities at issue. That’s not nothing. The bank, which wanted us to think it simply performed better, was involved in all the same practices as the institutions that blew up. Meanwhile, we’ve learned that even in the years since the crisis, JPMorgan Chase’s compliance efforts are subpar. The London Whale debacle took place in 2012. For the most part, the bank has been punished for actions by JPMorgan Chase employees at a time when CEO Jamie Dimon was overseeing them and when the executive team was taking great credit for the profits the bank was reaping.
The line of argument misses another important point. And it typifies the heads-I-win, tails-you-lose mentality that gets so many Americans angry at Wall Street. When you buy a company, or a piece of property, you don’t just acquire the assets. You acquire the liabilities—the contracts, the leases, the bank debt, the environmental problems. The price you pay isn’t just for the good stuff, in other words. Anybody who has negotiated the process of buying a home knows this. You settle on the price, and then, when the inspector says the roof is pretty much done, you adjust the price accordingly. That’s why it pays to conduct due diligence, whether you’re buying a condo or a giant bank.
While the Bear and WaMu deals were conducted hastily, and amid market turmoil, the rules still apply. In agreeing to take the good, JPMorgan Chase agreed to take the bad. And make no mistake, the bank was really pleased to do both deals. It was perfectly happy to acquire the functional businesses of Bear Stearns and the deposits and branches of Washington Mutual. A reasonable person might have assumed there were some serious problems at Bear Stearns, which competed in many of the same market sectors and whose headquarters were just a couple of blocks from JPMorgan Chase’s headquarters. For years, people referred to the bank as Bear Sleaze. Hedge funds it owned, which had employed vast leverage to bet on subprime bonds, loudly blew up in the summer of 2007. Its septuagenarian CEO, James Cayne, was spending a lot of time playing golf and going to bridge tournaments, where, Kate Kelly alleged in The Wall Street Journal, he was known to spark up a doober. (Cayne emphatically denied the charge.)
What’s more, we should dispense with the notion that JPMorgan Chase deserves some legal and regulatory slack because it was doing everybody a favor and because it had done the deals at the instigation of the government. Sure, Treasury Secretary Henry Paulson and other regulators were pleased that JPMorgan Chase agreed to take over faltering Bear Stearns. But I was there at the time. And JPMorgan Chase people thought they were getting a steal, the value of a lifetime. The price paid, $10 a share, came to about $1.2 billion. But the value of Bear Stearns’s headquarters building at 383 Madison was pegged at $1 billion. As Charlie Gasparino, then of CNBC, reported in the spring of 2008 Steve Black, the co-head of investment banking at JPMorgan Chase, said the bank “got something that has far more value than the price we paid” and that it expected to earn $1.1 billion from Bear Stearns businesses in 2009.
And while JPMorgan Chase put its own capital, reputation, and balance sheet at risk when it bought Bear Stearns, it also got a substantial assist from a public entity. The Federal Reserve created Maiden Lane to smooth the way for the deal. The Fed lent Maiden Lane $28.82 billion, and JPMorgan lent Maiden Lane $1.15 billion. Maiden Lane then turned around and bought $30 billion of mortgage-backed securities from Bear Stearns, thus removing a lot of toxic junk from Bear’s balance sheet. JPMorgan didn’t have to take on those assets. The loan it made to Maiden Lane was paid back. (The Fed also got all its money back, and then some.)
When JPMorgan Chase executives acquired Washington Mutual and Bear Stearns, they thought they were doing well by their shareholders. Five years later, the bank’s shareholders are paying the price for those actions, for the acquisition, and for the bank’s own problems.