Settlement talks between JPMorgan Chase CEO Jamie Dimon and a number of federal regulators, as well as the Department of Justice, have been in the news the past couple of weeks, and rumors of a breakdown in the negotiations caused a spike in the volume of JPMorgan on the New York Stock Exchange, although the stock did not move very much.
To provide background for its audience, C-SPAN's John McArdle interviewed Dan Fitzpatrick, who covers both JPMorgan and Bank of America for The Wall Street Journal. Fitzpatrick had reported that talks may have hit a snag, and he explained the issues and the mechanics of the negotiations. His discussion was followed by questions from callers who showed a remarkable understanding of the subject.
The most important single point to understand is that settlement of the civil suits, as JPMorgan is trying to do for a figure in the neighborhood of $13 billion, would not affect the criminal case or any ongoing criminal investigations. Also, in response to a viewer question regarding the statute of limitations, Fitzpatrick said that prosecutors have dusted off an old savings and loan statute that gives them an additional 10 years to bring charges in cases of fraud.
McArdle called the settlement talks "the big news in the financial world." The talks revolve around charges that JPMorgan sold what turned out to be low-quality mortgage securities during the period leading up to the 2008 episode of the ongoing financial crisis. He began by asking Fitzpatrick how a reported settlement with the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, which are under government conservatorship, relates to the $13 billion total.
Fitzpatrick responded that the settlement with the FHFA was always meant to be part of the overall deal, but the negotiations are separate, and when it looked like the DOJ negotiations might be hitting a snag, FHFA Director Ed DeMarco decided to do his own thing, and that agency issued its own press release.
The hope on JPMorgan's part is still to wrap that deal into the overall settlement, but there appear to be some snags that need to be resolved. For example, JPMorgan is claiming that because it acquired Washington Mutual out of a receivership administered by the FDIC, the FDIC should cover the liabilities arising from that securitization business.
In response to further questions from McArdle, Fitzpatrick said he doesn't know how many suits will be included, and he proceeded to list a number of sources of litigation, including New York Attorney General Eric Schneiderman, the National Credit Union Administration (NCUA) and the aforementioned FHFA, and he mused that it's difficult to keep track of all of the suits. Later he referred to the prospect of private litigation, and he cited a suit brought by Deutsche Bank for $10 billion arising from its dealings with WaMu and one by private investors seeking $6 billion.
Fitzpatrick added that one of the objectives of JPMorgan is to "get clearance" on any sort of future suits regarding pooling and servicing agreements in connection with mortgage securitizations, an activity many banks engaged in prior to the 2008 episode. Many of these were sold to Fannie Mae and Freddie Mac, which gave rise to the litigation involving the FHFA.
Fitzpatrick explained that the DOJ has a task force that is looking into mortgage fraud and noted Schneiderman is a member. The task force has been farming out the investigative work to U.S. attorneys around the country. For example, Ben Wagner, the U.S. attorney for the Eastern District of California, has been investigating JPMorgan itself, as opposed to the activities of Bear Stearns and WaMu, which the bank acquired, and he has been able to recruit a whistleblower who pointed to emails that warned higher ups that they weren't being forthright and honest about the quality of mortgages being sold to investors. This witness has helped prosecutors gain leverage on JPMorgan to continue to pursue the criminal cases.
JPMorgan has settled with the Federal Energy Regulatory Commission for only $410 million over charges that it manipulated energy markets in California, and with the trustee for MF Global over alleged responsibility for mishandling of customer funds. Also, Bernie Madoff has been saying from jail that JPMorgan "had to know" about his criminal activities.
Still pending is a criminal investigation over the roles of JPMorgan and other major banks, foreign and domestic, over alleged manipulation on LIBOR rates that form the basis for setting interest rates on millions of credit transactions, and JPMorgan is being investigated for alleged hiring of sons and daughters of well-connected Chinese officials.
There has been much debate over why JPMorgan has been the "target" for some much litigation beyond the obvious theory that the biggest banks know that they are backed by the federal government, so perhaps they feel less concerned than they otherwise would about how they conduct their businesses. Michael Hiltzik of the Los Angeles Times wrote an opinion piece on Oc. 21 titled "The Myth of the Obama Attack on JPMorgan's Jamie Dimon," which argued it's about time the authorities responded to the wave of scandals involving this bank.
Here's a somewhat different theory. After Attorney General Eric Holder testified that when the DOJ considers whether to prosecute the largest banks, it takes into account possible adverse effects on the banks and on the economy. These remarks heightened the visibility of an established policy and spawned a strong reaction in certain quarters of the public and on Capitol Hill, particularly among several Democratic senators who have had to answer questions in town hall meeting with their constituents.
Perhaps like any other enforcement agency, or any bureaucracy, for that matter, the DOJ is moving to lighten its load for the next funding cycle, in case Congress gets back to normal budget procedures instead of routinely passing continuing resolutions.
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