Why The JPMorgan Settlement Sucks For Investors

Oct.25.13 | About: JPMorgan Chase (JPM)

I have a major problem with this $13,000,000,000 'settlement' that JP Morgan (NYSE:JPM) is either being forced at gunpoint to accept or is happily signing. If the rumors of criminal indictment are true -- hard to believe, if JPM were turned into Arthur Andersen I think the financial markets would collapse -- that would explain why they would sign off on this ploy by the Justice Department. But these kinds of 'settlements' have been extorted under both Republican and Democratic Administrations because the Washington, DC bureaucracy (85% or more for the Democratic candidate every 4 years) thinks that taking from one group and giving to another is some warped sense of justice.

  • I don't believe it is fair.
  • I don't believe it is warranted.
  • I don't believe it punishes those who should be punished.
  • I don't believe it is good for investors or our financial markets.
  • I don't believe it is good for the American Middle Class.

Let's consider these facts:

(1) The guilty actors -- Washington Mutual (WaMu) and Bear Stearns -- no longer exist. Bear Stearns didn't make mortgages but they created mortgage-backed securities (MBS) and had lots of these assets on their books at a highly-leveraged (30-to-1) ratio. WaMu was the darling of state and federal regulators because of their liberal loan policies stoking the housing bubble.

(2) JP Morgan -- at great expense and lightning-quick response-wise (a 6 PM Sunday night deadline before Asian markets opened) -- stepped in to buy Bear Stearns at the government's request. The government also requested that JP Morgan and other banks buy failed banks like WaMu to help prevent systemic collapse and save the government the expense of running them and/or winding them down. So basically JP Morgan performed the Heimlich Maneuver for the U.S. Government, and now the government is repaying JPM by suing the company for saving his life because the maneuver resulted in a torn shirt. Lovely…..

(3) I see no criminal or large-scale civil penalties targeted at executives of WaMu or Bear Stearns. Nor at Golden West (owned by the Sandlers, huge California Democratic Party political donors, sunk by Option Arms and Alt-A lending) or Wachovia (sunk by Golden West after they bought it) or Wells Fargo (almost sunk by Wachovia after they bought it). Countrywide got off even though they admitted they were making toxic loans but it was Ken Lewis and BOA who paid out nearly $40 billion or 10 times what they paid for Countrywide back in 2008. BOA's stock price went down 90% -- but I'm supposed to believe Moynihan/BOA need to be "punished"?

(4) This criminal indictment talk of JPM -- if it is true -- is akin to what AIG was told by Elliot Spitzer when they stabbed Hank Greenberg and replaced him. And Citibank when they dumped Weill. And both firms got lousy CEOs to appease Spitzer and needed to be rescued in 2008. It's extortion by threatening to shut down a business as if they are Bendini, Lambert & Locke (the law outfit in the movie The Firm that worked for the Chicago Mafia). People are worrying about NSA intercepts reading our texts or emails with racy language, yet here is the government or prosecutors threatening to shut down a business and throw out of work tens of thousands (hundreds of thousands?) of American workers.

(5) Most Important: This penalty will not be paid by BS, WaMu, or even JP Morgan executives. It will be paid by 2 groups of JP Morgan'ers: shareholders and employees. The shareholders did nothing wrong, and now $13 billion (enough to buy back nearly 7% of the stock) is gone.

The employees ? Do you think the 'restructuring' to pay for this outlay is going to be from those JPMorgan employees making $250,000 and above - let alone $1,000,000 and above? -- or the Middle Class workers making $30,000 - $150,000? When JPM announces 3,500 layoffs, are they going to all be from folks whose pictures appear in the Annual Report and arrive at work in limousines, or middle-class folks who work in branch offices and take the LIRR, NJ Transit, and NYC subways to work? And even if some higher-ups are laid off or walk the plank, who's going to be hurt more: the middle-class workers who get 3-6 months of severance pay and maybe have $75,000 in a 401(k) and a few hundred shares of JPM stock...or the Senior Executive who gets 2 years of severance pay, $10 million in vested and non-qualified bonuses, and tens of thousands of shares of restricted and unrestricted JPM stock?

It's one thing to go after a bank for errors, it's another thing to criminally indict them. Nobody is saying these banks made a habit of making bad loans or had that as their business model. Ultimately these Big Bad Corporations are composed of fallible human beings (and more fallible machines) and while they should be held liable to compensate for specific wrongs, class action or tort liabilities as well as civil/criminal indictments are punitive and mob vengeance - and an uninformed mob at that. Again, it is an unjustified enrichment of tort lawyers and maybe some plaintiffs ($2 million for spilling McDonald's coffee, anyone ?) for honest errors at best, sloppiness at worst.

I know of no bank that willingly or knowingly foreclosed on current mortgages or homes with no mortgage and/or made that part of their business plan. I do know of many subprime lenders whose business model targeted 500-550 FICO borrowers and their lending models were praised and encouraged by federal and state regulators (at least up to 2008) as well as politicians. Countrywide and Novastar were among the most egregious in this bucket.

Punish civilly and criminally the London cheats who lied about their marks in the "Whale" case to cover up their incompetence or keep getting bonuses. But even here: why is JPM being punished twice? They lost $6,000,000,000 because of these lying traders and the stock lost $30,000,000,000 in market capitalization....when is 'enough' enough ??

This 1999 New York Times article makes it clear beyond a shadow of a doubt that HUD and the federal government were forcing these garbage loans and looking to expand the practice, with an assist from current New York Governor Andrew Cuomo. Note the quote from Peter Wallison, who 10 years later would be on the Financial Crisis Committee and writing the minority report dissenting. If Wallison (author of the dissenting minority report on the Financial Crisis) is wrong and Phil Angelides (the majority author) is right, how come it is Wallison a decade earlier predicting a housing debacle and Angelides is running for office in California promising low-cost housing loans in order to get elected with the support of the very groups wanting the very subprime loans that caused the housing crash ?

Most of the worst banks that made garbage loans are out of business. But the politicians and media elite who continue to blame 'Wall Street' for the Credit Crisis are still around and still misinforming the American public about who caused the last one - and who is right now laying the seeds for the next bubble, too.

Punishing JPMorgan shareholders and investors in 2013 does not punish the guilty actors from years ago. It simply will encourage the higher-ups in any firm suspected of gray-area behavior to 'get theirs' while the going is good and then leave the Little Guys holding the bags when the Feds come looking for their pound of flesh.

Dick Fuld (Lehman Brothers) and Jimmy Cayne (Bear Stearns) each lost hundreds of millions of dollars when their company stocks headed towards zero. They lost more in absolute and relative terms, but the impact to Little Shareholders and the Middle Class workers at Lehman and Bear who had to pound the pavement after losing their jobs meant that exacting a pound of flesh from Fuld and Cayne cost the folks underneath much more. Is costing billionaires half their financial assets worth inflicting financial pain and duress on Middle Class Americans and Small Investors ?

When does this insanity stop ?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.