The government’s legal pursuit of JPMorgan Chase & Co. has struck some on Wall Street as unfair. CEO Jamie Dimon recently reached a tentative deal with the Justice Department to put an end to some of the embattled financial firm’s legal troubles, a settlement worth $13 billion in fines and consumer relief; it’s the biggest settlement ever announced involving a single company. In fact, this was a just outcome, and it should be a new model for holding financial institutions accountable in probes related to bad mortgages and the 2008 financial crisis.
JPMorgan Chase is accused of selling mortgage securities that it knew were faulty, although it inherited many of the alleged abuses in its 2008 acquisitions of Washington Mutual and Bear Stearns. JPMorgan Chase’s supporters argue that it only purchased the two banks under duress, when pressed by government officials to do so in an effort to prop up the banking system in the early days of the credit crisis. That’s not entirely true, however. JPMorgan Chase had sought to purchase Washington Mutual several months before the crisis struck. Plus, even after paying the government settlement, JPMorgan Chase will come out way ahead on the deal. Washington Mutual had a $40 billion market capitalization when JPMorgan Chase purchased it for $1.9 billion, and its mortgage business’s performance has outpaced expectations ever since. No one will pity Dimon and his shareholders the $750 million Washington Mutual earned the bank last quarter.
The government has been roundly criticized for failing to penalize those responsible for destabilizing the housing market and bringing the world’s financial systems to its knees. But the Justice Department appears to have found its footing with this tough stance against JPMorgan Chase. As the Washington Post reports, prosecutors have expanded their use of an obscure law dating from the savings-and-loan scandals of the late 1980s, which sets a lower burden of proof while lengthening the statue of limitations on securities violations. Looking at his bank’s balance sheet, Dimon was clearly willing to pay a large price to shed the civil charges related to the settlement, but Attorney General Eric Holder refused to back off of possible criminal charges related to the bad mortgages or the other legal problems JPMorgan Chase currently faces: Chinese bribery allegations, accusations that the comany turned a blind eye to Bernie Madoff’s Ponzi scheme, and interest-rate manipulation, to name a few.
More importantly, the Justice Department insisted that the settlement provide some direct relief to consumers, including lowering the balances of borrowers who owe significantly more than their homes are worth. JPMorgan Chase emerged from the financial crisis relatively unscathed, so its settlement should pave the way to similar deals with worse offenders. The Justice Department already is investigating the sale of mortgage-backed securities by at least nine other banks, the Financial Times reports. With their dealings with JPMorgan Chase, Holder and his colleagues have rightfully established that settlements with those institutions won’t come cheaply.