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Home Publications Blogs Beat the Press Post Granny Bashers Are Whining for J.P. Morgan

Post Granny Bashers Are Whining for J.P. Morgan

Sunday, 20 October 2013 08:01

You've got to love those Washington Post folks. They continuously use both their news and editorial sections to push for cuts to Social Security, Medicare, and disability insurance, running roughshod over journalistic standards and data. But when it comes to the Wall Street boys, they just can't help but to tear at our heart strings.

Last week the Post ran an editorial bemoaning the "political persecution" of J.P. Morgan. It complained that the government was pursuing a civil case against J.P. Morgan for misrepresenting mortgage backed securities it sold to investors during the housing bubble years:

"Yet 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."

There are two points worth making on this. First, if 70 percent of the securities came from Bear Stearns and Washington Mutual, then 30 percent came from J.P. Morgan. This means that it could have been involved in misrepresenting tens of billions of dollars in mortgage backed securities sold to investors. We have young men sitting in jail for stealing cars worth a few thousand dollars, but the Post thinks that Wall Street bankers should get a pass on fraudulently passing off tens of billions in bad mortgage backed securities.

The other point is that executives of large corporations like J.P. Morgan are supposed to understand that when they take over a company it can involve both upside and downside risks. On the upside, the company may have product lines or assets that the buyer did not fully appreciate at the time of the acquisition. On the downside, it may have liabilities such as the legal issues being raised in the Justice Department suit.

Believers in free markets would expect that a CEO like J.P. Morgan's Jamie Dimon understood such risks at the time he chose to buy up Bear Stearns and Washington Mutual. However the Post apparently feels that he and his bank need a special hand from the government to change the terms of the deal after the fact and release J.P. Morgan from the billions of dollars of liabilities they inherited when they bought the banks. Their concern for the desperate plight of the Wall Street bankers is touching, but those of us who believe in free markets must insist on contracts being respected and laws being enforced.

It is worth noting that J.P. Morgan apparently disagreed with the Post and thought that the government had a pretty good case since it settled for $13 billion.

Comments (16)Add Comment
Chump Change is for Chumps
written by Last Mover, October 20, 2013 9:55

Eric Holder says prosecution of banks will damage the economy. Someone has to fall on the sword of political persecution to whet the appetite of loser liberal revenge.

Why not JP Morgan? No one goes to jail, the persecution is publicized and the public believes $13B is a really big number compared to late fees and traffic tickets.

It's a good thing no one ran it through the CEPR calculator as a percentage of total damage caused by the investment banks. It would never have shown up on MSM radar with so many decimal points.
written by skeptonomist, October 20, 2013 10:12
The case was unfair - why wasn't the Fed also sued? It played a major role in the acquisition of Bear Stearns by J.P. Morgan.
written by Richard, October 20, 2013 10:17
So maybe the WaPo0 need some basic math lessons as well. If Bear Stearns and Washington Mutual accounted for 70% and JP Morgan by itself accounted for 30%, then JP Morgan just wasn’t trying hard enough. 35%, 35% and 30% – those are all some pretty hefty percentages.
written by Squeezed Turnip, October 20, 2013 12:20
skepto, the Fed was nowhere around in 2007 when JPM was touting their RMBS as golden when in fact their underlying values were plummeting. That was the criminal act. The fact that Bear Stearns or WaMu did the same thing is moot.

Did the Fed do the right thing? Read Perry Mehrling's "The New Lombard Street" to understand how their hand got forced into playing dealer rather than lender.
written by skeptonomist, October 20, 2013 2:37
Well, I was being a bit ironic, but by bailing all these people out as well as facilitating the consolidation of the big banks the Fed was effectively abetting felonies. Why weren't they aware of all this stuff all along - it's supposed to be their job. Apart from politics the Fed did not need to do most what it did to preserve the banks - Dean spelled out the alternative at the time on this blog.
It's a slap on the wrist really
written by Jennifer, October 20, 2013 9:00
First of all, when considering how money JPM has it's not that big of a fine. But the real issue is this:
"We have young men sitting in jail for stealing cars worth a few thousand dollars"

We have young men in prison for 20+ years for an ounce of pot. We have young women in jail because they made a phone call for one of those young men. There is a young woman, Marissa Alexander, in jail for 20 years for shooting a gun in the air for self-defense from her husband, a known abuser.
And we have high employment, so many people struggling to survive on low-paying, part-time jobs who are told it's their fault for not being educated enough, or not having the right kind of education. It's rare to go more than a few days for me not to hear "why isn't a big banker in jail". The least they can do is pay a fine.
JP Morgan has a difficult time claiming innocence on their acquisitions.
written by John Wright, October 20, 2013 9:23
If 30% of the misrepresented MBS were from JPM, this implies JPM had a lot of experience with these.

They had probably competed against other industry players in producing these securities.

It is then not plausible JPM was caught unaware that the companies JPM was acquiring had also issuing similar MBS securities.

Perhaps JPM took a calculated risk that the Bush and Obama administrations would look the other way.

And given Obama's eventual lack of interest in pursuing legal actions against the financial industry and replacement of effective regulators to appease the industry (Gary Gensler), this was probably a good business risk.

It just didn't quite work out perfectly.
role of the Fed
written by Squeezed Turnip, October 21, 2013 6:19
no doubt greenspan was, and is, clueless. With all due respect to Dean system(and skepto), the payment system was in deep doo-doo and up to that point the Fed was shown only the tip of the iceberg. Remember, originally FRBNY originally offered Bear Stems a $30 (?) billion 30 day (as opposed to overnight) loan, but then withdrew the offer. BS had the capital, but lost the confidence of the market: chicken little won the war.

Obviously none of this wouldn't have happened if Greenspan had a lick of sense. I'm not saying the Fed is wholly innocent.
Break up the banks and jail the CEO's and others.
written by pretty meadow, October 21, 2013 12:00
The FEDERAL RESERVE is complicit in these dealings. After all the Federal Reserve is OWNED by these same big banks that crashed the economy. It's an over sized ponzi scheme that will crash sooner or later. I'm betting on sooner.

These people ALL need to go to jail and the banks need to be broken up. The Federal Reserves only current purpose is to remove toxic assests from the biggest banks ledgers and all at the expense of tax payers.

The Federal Reserve itself needs to disappear and go away.

and furthermore ...
written by David S., October 21, 2013 12:25

As a corollary to your second point, perhaps JP Morgan was fully aware of the legal risks it assumed when acquiring Bear Stearns and WaMu. If so, it likely priced the acquisitions to reflect the potential for future payouts based upon claims of fraud in connection with the sale of mortgage-backed securities by those entities.

Thus, if we continue to treat Jamie Dimon as the wunderkind of Wall Street, failure to require JP Morgan to pay for such fraud would allow JP Morgan to receive a double recovery -- once, in the form of a lower purchase price for each entity and, again, in the form of the non-liability for which the WaPo advocates.
Where are the details?
written by Perplexed, October 21, 2013 12:43
How is it that almost 7 years after the discovery of the largest counterfeit fraud ever conducted, we still don't know what the impact of the fraud was on the size of the "bubble"? Does this exceed the mathematical abilities of economists or are they just not interested in these "trivialities" that resulted in so much damage. Without the money generated by the fraud, where would the funding have come from to "expand" this bubble?

"The other point is that executives of large corporations like J.P. Morgan are supposed to understand that when they take over a company it can involve both upside and downside risks."

These are the very same "executives" that were the "managers" of the counterfeit fraud. Not only are they not in jail, they are now running even larger "enterprises" than they were prior to the fraud. What is the "economic impact" of the message this sends to the hundreds of thousands of employees of these "enterprises"?
Beat the blog!
written by Blissex, October 21, 2013 1:50
Some really important details that this blogger has omitted:

* A settlement means that the buyback clause in the fraudulent securities can't be invoked by the buyers who have been defrauded.

* A civil action means that no fraudster is being prosecuted, for the same reason.

* If the fine is a tax-deductible loss, and if JPM pays much corporate tax, a significant chunk will be paid for by the Treasury.

* 13 billions is peanuts compared both to the damage caused, the likely profits made by JPM on those fraudulent securities, and overall profits and net worth of JPM.

Overall it is not even a slap on the wrist, it looks very much like a PR operation jointly designed by the Administration and JPM to throw a tiny bone to the public and suggest that JPM's bad behaviour was so mild that it was worth just a tiny fine.
written by nounjb, October 21, 2013 3:46
Why are the above commenters overlooking the fact that the issue is not yet complete, in that the proposed settlement is for cival charges with criminal ones still in play.

written by Bob Pinkus, October 21, 2013 7:07
to skeptonomist -

"The case was unfair - why wasn't the Fed also sued? It played a major role in the acquisition of Bear Stearns by J.P. Morgan."

The case had nothing to do with the acquisition of Bear Stearns. Do a little research.
written by sherparick, October 22, 2013 10:36
Another thing about Bear Stearns and WaMu takeovers that the business press is not now mentioning. J.P. Morgan also go the assets of Bear Stearns and WaMu for essentially nothing. In fact, I remember much gnashing of teeth at the time (March 2008) by Bear Stearns stockholders complaining about how the deal wiped out most of their equity (of course, if Bears Stearns had been allowed to go bankrupt they would have gotten the same deal Lehman Brothers and WaMu stockholders got, Nada!!!). So basically, J.P. Morgan was able to buy two large financial institutions for an additional $13 billion dollars paid 5 years later, in addition to the about $3 billion it paid in 2008. A good deal for JP Morgan Chase!! Ol' JP down in the 7th circle would be happy at what his successors have snagged. http://en.wikipedia.org/wiki/Washington_Mutual and http://blogs.wsj.com/moneybeat...-p-morgan/
written by PeonInChief, October 22, 2013 11:29
The Post is trying to argue that Jamie Dimon couldn't have known about WaMu's problems? I knew about WaMu's problems. Everyone knew about WaMu's problems. If Jamie Dimon didn't know, he should at least be fired for incompetence.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.