JPMorgan’s bait-and-switch: The ballyhooed settlement is just a scam!

Ignore all the noise about the “big” fraud settlement JPMorgan supposedly just signed. Here’s why it’s one big zero by David Dayen (Salon)

JPMorgan Chase CEO Jamie Dimon (Credit: Reuters/Yuri Gripas)
JPMorgan Chase CEO Jamie Dimon (Credit: Reuters/Yuri Gripas)

The first thing you need to know about JPMorgan Chase’s long-awaited $13 billion deal with the Justice Department — to settle a number of civil lawsuits related to the fraudulent sale of mortgage-backed securities — is that it’s not a $13 billion deal. $4 billion of this figure, over 30 percent, was announced almost a month ago as the conclusion of a lawsuit between JPMorgan and the Federal Housing Finance Agency.

Attorney General Eric Holder, wanting to stand at a podium and give out a really big settlement number, simply folded the FHFA settlement into the Justice Department’s. Why news editors who have already reported on the FHFA settlement would let the Justice Department use it again in its headline figure is completely beyond me. They aren’t obligated to do the Justice Department’s P.R. for them. We don’t say the Miami Heat beat the San Antonio Spurs 200-98, but 100 of those points came from a previous game.

So, let’s talk about this $9 billion settlement. Even that headline number doesn’t really reflect the actual penalty to JPMorgan Chase’s bottom line. Nearly half of the figure comes in the form of “mortgage relief,” which an independent monitor (and what’s so independent about a monitor chosen by the bank?) has four years to distribute. Any time you extend the time horizon of a penalty, you’re reducing its real value. And in this case, there’s not much value here to begin with.

The bank only has to put $1.2 billion of the $4 billion into first-lien principal reductions for homeowners facing foreclosure. $300 million goes toward extinguishing second liens, like a home equity line of credit. Another $300 million is earmarked for principal forbearance, where the homeowner still owes the money but gets to skip a few immediate payments. $2 billion would go toward interest-rate reductions or refinancing or even writing new mortgages for moderate-income borrowers (that’s a penalty, writing mortgages that pay the bank interest?), and the balance toward anti-blight provisions like bulldozing homes or buying out properties where the bank has delayed foreclosure.

Almost none of this represents a real penalty for the bank. It performs anti-blight procedures annually in its normal course of business. Principal forbearance has minuscule long-term cost. Second liens that typically cannot be recouped are worthless to a bank, and it’s hard to say it “costs” anything to extinguish them. The bank is even credited for writing down principal on loans owned by mortgage-backed securities investors, paying off their fine with other people’s money (the other people in this case being the very investors they defrauded!). And all the measures to help struggling homeowners actually help JPMorgan Chase in the long run, because it makes financial sense to modify loans rather than foreclose. It’s good to align financial incentives properly to force the bank to help homeowners now instead of kicking them out of their homes. But as a penalty for misconduct, it’s less than meets the eye, all told maybe 10 cents on the dollar to JPMorgan’s bottom line. Factor that in and you get a $5.4 billion deal.

As a side note, the principal reductions will actually hurt homeowners more than they help them, unless Congress extends the Mortgage Forgiveness Debt Relief Act. If not, all principal reductions of this type will be taxable income for the homeowner. Poor people who need principal write-downs to save their house don’t typically have bags of cash lying around to pay off tax bills they didn’t think they’d get. The hardship exemptions for homeowners who cannot pay the tax require significant tax planning, the functional equivalent of declaring bankruptcy to the IRS. It will be a nightmare for homeowners who get blessed with this “gift.”

It’s positive that the $5.4 billion deal stops JPMorgan Chase from trying to raid the FDIC to pay penalties arising from misconduct at Washington Mutual, the failed bank whose assets they purchased in 2008 (JPMorgan claims, against all evidence, that when they bought the assets, they didn’t assume the legal liabilities). But the bank can still try to take money from the FDIC receivership that liquidated WaMu as payment in a separate settlement, a $4.5 billion deal with institutional investors, also over the fraudulent sale of mortgage-backed securities. So JPMorgan hasn’t stopped trying to get the FDIC to pay off its debts, they’ve just changed the debts in the mix from public penalties to private ones. Since the FDIC makes its money from assessments on banks, this reflects JPMorgan trying to get its competitors to pay its fines.

Meanwhile, almost all of the deal, save a $2 billion penalty to the U.S. Attorney’s Office in Sacramento to settle a civil lawsuit, is tax deductible as a business expense. Assuming a 38 percent rate for deductions (as JPMorgan does) on $7 billion in business expenses, this knocks another $2.66 billion off the real cost to JPMorgan Chase. A ballyhooed $13 billion settlement winds up being closer to $2.74 billion. That’s less than what BP or GlaxoSmithKline paid in their Justice Department settlements.

Of course, as my colleague Alex Pareene pointed out weeks ago, it’s impossible for the punishment to fit the crime here, in monetary terms. If you calculate the actual harm done through fraud in the housing market and the impact on the broader economy, JPMorgan and its fellow banks would owe more money than they could ever scrounge up. Jail sentences for those who authorized and directed the conduct could at least create a deterrent for the future, but while criminal cases are not closed by this settlement, I will take all bets on whether they will ever come to fruition. JPMorgan is in fact cooperating with criminal cases against its former traders, the equivalent of having O.J. Simpson actually partner with police to find the real killer. You don’t cooperate with a transnational criminal enterprise, you dismantle it.

The statement of facts accompanying the settlement — where JPMorgan acknowledges that they and their affiliates sold mortgage-backed securities while knowing that the mortgages backing the bonds did not meet underwriting standards they promised to investors — would have been good to know before the bank settled mortgage-backed securities claims with private investors just last week. In fact, you could see the long delay in finalizing the settlement as deliberately facilitated by JPMorgan, so the statement of facts couldn’t be used against them in other cases.

This settlement, seen as a model for future Justice Department cases against banks, is supposed to be evidence of the impact of the vaunted financial fraud task force put together early last year. Let’s go back to when this task force was created.

Liberal activists wanted banks to pay hundreds of billions for their foreclosure fraud crimes through mass write-downs, effectively resetting the housing market and ridding homeowners of their “underwater” mortgages. Instead, the government settled for $25 billion with five banks (note: that number is inflated, too), and in the bargain, created this task force. At the time, I and other reporters and activists were told that the task force would strike at the heart of the problem, fraud in the packaging and sale of mortgage-backed securities. The liability attached to that fraud, the story went, was much higher than for the robo-signing scandal or other abuses of homeowners. Law enforcement could “build a bigger table,” creating the conditions for forcing much larger payouts by the banks.

How did that work out? The top-line numbers look robust from a public relations perspective, but I’ve already pointed out how they don’t reflect reality; in fact, the $1.2 billion in first-lien principal reductions is less than JPMorgan Chase’s obligation under the original foreclosure fraud settlement. Nearly two years into the task force, there’s no bigger table. Nobody has seen the inside of a prison cell; no criminal subpoenas have even been issued. And the monetary penalties are not shaking JPMorgan Chase or any other bank to their core. In fact, in this case, the people who might get hurt most are the homeowners.

It’s beyond clear that giving away indemnity for illegal foreclosures to get the resources to prosecute the “real” fraud was a bait-and-switch. The very premise was flawed; you don’t indemnify one set of crimes to get to the other, you prosecute wherever possible. This idea of a “new aggressiveness” from the Justice Department on prosecuting big banks is hokum. The giveaways may be sneakier and more well-hidden, but they’re still giveaways. And accountability is still nowhere to be found.

David Dayen is a contributing writer for Salon. Follow him on Twitter at @ddayen.


“Not A Single Elite Banker Whose Frauds Drove The Financial Crisis in the U.S. has been prosecuted”

Video of the Day: Interview with Matt Taibbi About JP Morgan and the CNBC “Presstitutes”

Why the Senate Won’t Touch Jamie Dimon: JPM Derivatives Prop Up U.S. Debt by Ellen Brown

When Jamie Dimon, CEO of JPMorgan Chase Bank, appeared before the Senate Banking Committee on June 13, he was wearing cufflinks bearing the presidential seal.  “Was Dimon trying to send any particular message by wearing the presidential cufflinks?” asked CNBC editor John Carney.  “Was he . . . subtly hinting that he’s really the guy in charge?”

The groveling of the Senators was so obvious that Jon Stewart did a spoof news clip on it, featured in a Huffington Post piece titled “Jon Stewart Blasts Senate’s Coddling Of JP Morgan Chase CEO Jamie Dimon,” and Matt Taibbi wrote an op-ed called “Senators Grovel, Embarrass Themselves at Dimon Hearing.”  He said the whole thing was painful to watch.

“What is going on with this panel of senators?” asked Stewart.  “They’re sucking up to Jamie Dimon like they’re on JPMorgan’s payroll.”  The explanation in a news clip that followed was that JPMorgan Chase is the biggest campaign donor to many of the members of the Banking Committee.

That is one obvious answer, but financial analysts Jim Willie and Rob Kirby think it may be something far larger, deeper, and more ominous.  They contend that the $3 billion-plus losses in London hedging transactions that were the subject of the hearing can be traced, not to European sovereign debt (as alleged), but to the record-low interest rates maintained on U.S. government bonds.

The national debt is growing at $1.5 trillion per year.  Ultra-low interest rates MUST be maintained to prevent the debt from overwhelming the government budget.  Near-zero rates also need to be maintained because even a moderate rise would cause multi-trillion dollar derivative losses for the banks, and would remove the banks’ chief income stream, the arbitrage afforded by borrowing at 0% and investing at higher rates.

The low rates are maintained by interest rate swaps, called by Willie a “derivative tool which controls the bond market in a devious artificial manner.”  How they control it is complicated, and is explored in detail in the Willie piece here and Kirby piece here.

Kirby contends that the only organization large enough to act as counterparty to some of these trades is the U.S. Treasury itself.  He suspects the Treasury’s Exchange Stabilization Fund, a covert entity without oversight and accountable to no one. Kirby also notes that if publicly-traded companies (including JPMorgan, Goldman Sachs, and Morgan Stanley) are deemed to be integral to U.S. national security (meaning protecting the integrity of the dollar), they can legally be excused from reporting their true financial condition.  They are allowed to keep two sets of books.

Interest rate swaps are now over 80 percent of the massive derivatives market, and JPMorgan holds about $57.5 trillion of them.  Without the protective JPMorgan swaps, interest rates on U.S. debt could follow those of Greece and climb to 30%.  CEO Dimon could, then, indeed be “the guy in charge”: he could be controlling the lever propping up the whole U.S. financial system.

Hero or Felon?

So should Dimon be regarded as a national hero?  Not if past conduct is any gauge.  Besides the recent $3 billion in JPMorgan losses, which look more like illegal speculation than legal hedging, there is JPM’s use of its conflicting positions as clearing house and creditor of MF Global to siphon off funds that should have gone into customer accounts, and its responsibility in dooming Lehman Brothers by withholding $7 billion in cash and collateral.  There is also the fact that Dimon sat on the board of the New York Federal Reserve when it lent $55 billion to JPMorgan in 2008 to buy Bear Stearns for pennies on the dollar.  Dimon then owned nearly three million shares of JPM stock and options, in clear violation of 18 U.S.C. Section 208, which makes that sort of conflict of interest a felony.

Financial analyst John Olagues, a former stock options market maker, points out that the loan was guaranteed by $55 billion of Bear Stearns assets.  If Bear had that much in assets, the Fed could have given it the loan directly, saving it from being swallowed up by JPMorgan.  But Bear did not have a director on the board of the NY Fed.

Olagues also notes that JPMorgan received an additional $25 billion in TARP payments from the Treasury, which were evidently paid off by borrowing from the NY Fed at a very low 0.5%; and that JPM executives received some very large and highly suspicious bonuses called Stock Appreciation Rights and Restricted Stock Units (complicated variants of employee stock options and restricted stock).  In 2009, these bonuses were granted on the day JPMorgan stock reached its lowest value in five years.  The stock quickly rebounded thereafter, substantially increasing the value of the bonuses.  This pattern recurred in 2008 and 2012.

Olagues has evidence of systematic computer-generated selling of JPMorgan stock immediately prior to and on the dates of the granted equity compensation.  Collusion to manipulate the stock to accommodate the grant of options is called “spring-loading” and is a violation of SEC Rule 10 b-5 and tax laws, with criminal and civil penalties.

All of which suggests we could actually have a felon at the helm of our ship of state.

There is a movement afoot to get Dimon replaced on the Board, on the ground that his directorship represents a clear conflict of interest.  In May, Massachusetts Senate candidate Elizabeth Warren called for Dimon’s resignation from the NY Fed board, and Vermont Senator Bernie Sanders has used the uproar over the speculative JPM losses to promote an overhaul of the Federal Reserve.  In a release to reporters, Warren said:

“Four years after the financial crisis, Wall Street has still not been held accountable, and that lack of accountability has history repeating itself—huge, risky financial bets leading to billions in losses. It is time for some accountability. . . . Dimon stepping down from the NY Fed would be at least one small sign that Wall Street will be held accountable for their failures.”

But what chance does even this small step have against the gun-to-the-head persuasion of a nightmare collapse of the entire U.S. debt scheme?

Propping Up a Pyramid Scheme

Is there no alternative but to succumb to the Mafia-like Wall Street protection racket of a covert derivatives trade in interest rate swaps?  As Willie and Kirby observe, that scheme itself must ultimately fail, and may have failed already.  They point to evidence that the JPM losses are not just $3 billion but $30 billion or more, and that JPM is actually bankrupt.

The derivatives casino itself is just a last-ditch attempt to prop up a private pyramid scheme in fractional-reserve money creation, one that has progressed over several centuries through a series of “reserves”—from gold, to Fed-created “base money,” to mortgage-backed securities, to sovereign debt ostensibly protected with derivatives.  We’ve seen that the only real guarantor in all this is the government itself, first with FDIC insurance and then with government bailouts of too-big-to-fail banks.  If we the people are funding the banks, we should own them; and our national currency should be issued, not through banks at interest, but through our own sovereign government.

Unlike Greece, which is dependent on an uncooperative European Central Bank for funding, the U.S. still has the legal power to issue its own dollars or borrow them interest-free from its own central bank.  The government could buy back its bonds and refinance them at 0% interest through the Federal Reserve—which now buys them on the open market at interest like everyone else—or it could simply rip them up.

The chief obstacle to that alternative is the bugaboo of inflation, but many countries have proven that this approach need not be inflationary.  Canada borrowed from its own central bank effectively interest free from 1939 to 1974, stimulating productivity without creating inflation; Australia did it from 1912 to 1923; and China has done it for decades.

The private creation of money at interest is the granddaddy of all pyramid schemes; and like all such schemes, it must eventually collapse, despite a quadrillion dollar derivatives edifice propping it up.  Willie and Kirby think that time is upon us.  We need to have alternative, public and cooperative systems ready to replace the old system when it comes crashing down.

One Comment

  1. jamesbanville

    I don’t understand the nuts and bolts of high finance but I do understand enough to know that the specimens who run the corrupt and criminal banks and other financial institutions are corporate psychopaths who have brought misery and poverty and a sense of hopelessness to millions of good people all over this planet while they get ever richer. The so called regulatory authorities and corrupt governments collude with them and aid and abet them.
    I can feel my chest pounding as I write because I cannot conceive of a solution to this filthy mess, the problem is so big and the corruption so deep it seems only a bolt from Heaven or Hell will stop these vile criminals and their dirty business. I can never resist the temptation to quote Percy Shelley who said, concerning his own anger at a particular injustice, “My indignation has not yet done boiling in my veins”, and I fear it never will.
    I comfort myself with the thought that these people cannot take their ill-gotten gains with them so they can cancel the asbestos lined containers they have on order.
    Come back Tony Soprano, we need you, and fetch your tools with you.

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