A lot of people all over the world are having opinions now about the ostensibly gigantic $13 billion settlement Jamie Dimon and JP Morgan Chase have entered into with the government.
The general consensus from most observers in the finance sector is that this superficially high-dollar settlement -- worth about half a year's profits for Chase -- is an unconscionable Marxist appropriation. It's been called a "robbery" and a "shakedown," in which red Obama and his evil henchman Eric Holder confiscated cash from a successful bank, as The Wall Street Journal wrote, "for no other reason than because they can and because they want to appease their left-wing populist allies."
Look, there's no denying that this is a lot of money. It's the biggest settlement in the history of government settlements, and it's just one company to boot. But this has been in the works for a long time, and it's been in the works for a reason. This whole thing, lest anyone forget, has its genesis in a couple of state Attorneys General (including New York's Eric Schneiderman and Delaware's Beau Biden) not wanting to sign off on any deal with the banks that didn't also address the root causes of the crisis, in particular the mass fraud surrounding the sale and production of subprime mortgage securities.
Those holdouts essentially forced the federal government's hand, leading Barack Obama to create a federal working group on residential mortgage-backed securities (widely seen as the AGs' price for okaying the $25 billion robosigning deal), headed up by Schneiderman, whose investigation of Chase and its affiliates led to the deal that's about to be struck. Minus all of that, minus those state holdouts in those foreclosure negotiations, this settlement probably would never even take place: The federal government seemed more than willing previously to settle with the banks without even addressing the root-cause issues that are at the heart of this new Chase deal.
So let's not forget that -- that even this $13 billion settlement, which is actually a $9 billion settlement (see below), came very close to never happening. But now it is happening, and the business press is going nuts about how unfair it all is.
In fact, this deal is actually quite a gift to Chase. It sounds like a lot of money, but there are myriad deceptions behind the sensational headline.
First of all, the settlement, as the folks at Better Markets have pointed out, may wipe out between $100 billion and $200 billion in potential liability -- meaning that the bank might just have settled "for ten cents or so on the dollar." The Federal Housing Finance Agency alone was suing Chase and its affiliates for $33 billion. The trustee in the ongoing Bernie Madoff Ponzi scandal was suing Chase for upwards of $19 billion.
Obviously, those plaintiffs may never have gotten that kind of money out of Chase. But just settling the mere potential of so much liability has huge value for the bank. It's part of the reason the company's share price hasn't exactly cratered since the settlement was announced.
Moreover, the settlement is only $9 billion in cash, with $4 billion earmarked for "mortgage relief." Again, as Better Markets noted, we've seen settlements with orders of mortgage relief before, and banks seem to have many canny ways of getting out of the spirit of these requirements.
In the foreclosure settlement, most of the ordered "relief" eventually came in the form of short sales, with banks letting people sell their underwater houses and move out without paying for the loss in home value. That's better than nothing, but it's something very different than a bank working to help families stay in their homes.
There's also the matter of the remaining $9 billion in fines being tax deductible (meaning we're subsidizing the settlement), and the fact that Chase is reportedly trying to get the FDIC to assume some of Washington Mutual's liability.
But overall, the key to this whole thing is that the punishment is just money, and not a crippling amount, and not from any individual's pocket, either. In fact, the deal that has just been completed between Chase and the state represents the end, or near the end, of a long process by which people who committed essentially the same crimes as Bernie Madoff will walk away without paying any individual penalty.
What Washington Mutual and Bear Stearns (Chase's guilty acquisitions) were doing in the mortgage markets was little more than an elaborate take on a Madoff-style Ponzi scheme. Actually, most of the industry was guilty of the same thing, but in the cases of these two banks in particular the concrete evidence of fraud is extensive, and the comparison to a Madoff-style caper isn't a fanciful metaphor but more like evidentiary fact.
Madoff's operational fiction was his own personality. He used his charm and his lifestyle and his social status to con rich individuals into ponying up money into an essentially nonexistent investment scheme.
In the cases of both WaMu and especially Bear, the operating fictions were broad, carefully-crafted infrastructures of bogus guarantees, flatlined due diligence mechanisms, corrupted ratings agencies and other types of legal chicanery. These fake guarantees and assurances misled investors about they were buying. Most thought they were investing in home mortgages. What they were actually investing in was a flow of cash from new investors that banks like Bear and WaMu were pushing into a rapidly-overheating speculative bubble.
These banks created huge masses of mortgage securities they knew to be highly risky and/or fraudulent. At Bear, one deal manager jokingly nicknamed one pool of mortgages, SACO-2006-08, the "SACK OF sh*t" deal. In another case, Bear's securitization company, EMC, obtained a pool of mortgages from a sketchy mortgage originator called AHM, and found out that as much as 60 percent of the batch was delinquent.