Opinion

Felix Salmon

Is JP Morgan being unfairly singled out?

By Felix Salmon
October 11, 2013

JP Morgan is the first big bank to suffer a quarterly loss on account of multi-billion-dollar legal bills. It is also the most profitable bank in America (or was, up until this morning). Which means there are three possibilities here:

  1. The profits and the fines share a common cause: the internal behavior which produces massive profits also — eventually — has a tendency to produce massive fines.
  2. The profits and the fines are unrelated: it’s just unfortunate bad luck that such a well-run, profitable bank should come unstuck in this manner.
  3. The profits in some way caused the fines: regulators feel comfortable going after JP Morgan precisely because it has a fortress balance sheet and can easily pay the fines.

All three of these have a kernel of truth to them, I think. If you look at misbehavior like the Libor scandal or the London Whale debacle, the misconduct in question was clearly driven by traders looking to make as much money as possible. But all banks have traders looking to make as much money as possible, and most of the world’s biggest banks have been sucked in to the Libor scandal, in one way or another. And if you look at classic trading blowups, they’re pretty uncorrelated with profitability.

JP Morgan is also a little bit unlucky here, in that it’s literally paying the price for misconduct at companies (WaMu and Bear Stearns) it wasn’t managing when the misconduct took place. Few of us are going to shed any tears as a result: those two acquisitions were still wildly profitable for JP Morgan even after accounting for all their associated legal liabilities. But it is a bit of a stretch to blame Jamie Dimon personally for actions which took place at rival banks, before he bought those banks.

But it’s the third possibility which is the most intriguing. JP Morgan is hardly alone in having engaged in the kind of behavior which has produced all these fines — but it is alone in building up a $23 billion reserve against future legal costs, and spending $9.2 billion on such things in a single quarter. Were Washington Mutual and Bear Stearns really worse than Countrywide and Merrill Lynch? If not, how come it’s JP Morgan with the legal losses, and not Bank of America as well?

One theme running through the aftermath of the financial crisis is that banks have to some extent been insulated from being held accountable for their actions by fears that aggressive prosecutions could endanger America’s fragile economic recovery. We’re trying to recapitalize the banks, trying to get them to lend more; if we simply suck out all their capital in the form of fines, then that will only serve to weaken them. If that’s a real fear, and I think it probably is, in corners of Washington, then it makes sense that JP Morgan would be the biggest target of prosecutorial zeal — just because it’s the bank with the strongest balance sheet, and therefore the bank which is most capable of paying big fines.

None of which in any way excuses JP Morgan’s actions, or implies that the fines it’s suffering are any less than fully deserved. It just implies that weaker banks might also deserve such massive fines as well — and are managing to avoid them only because they have less ability to pay them.

I’m fine with this possibility. When the Obama administration was forced to decide whether or not to nationalize America’s biggest banks, it knew that one of the consequences of its ultimate choice — not to nationalize — was that it would see less upside if and when its bailout worked. So in a weird way, JP Morgan’s current legal woes are a way of it paying the US government back for all the help we gave the bank during and after the financial crisis.

Think about it this way: let’s say you went up to Jamie Dimon during the height of the crisis, and told him that the Fed would implement an all-out flood of liquidity, and the Bush and Obama administrations would stop at nothing in their attempts to rescue the financial system, on one condition. The bargain would be this: if all those efforts worked, and JP Morgan ended up as a bank making $6 billion per quarter in profits, then at that point it would have to fully atone, with a few quarters’ profits, for its own sins and those of the banks it wanted to acquire. JP Morgan’s solvency and capital adequacy would be guaranteed: it would only face the fines if it was more than capable of paying them.

Dimon would have jumped at such a bargain, and so would any other bank CEO. (Well, maybe not Dick Fuld.) As a result, JP Morgan’s fines are entirely fair. They are deserved on a narrow basis, and they are easily within the bank’s ability to repay. The only reason for Dimon to feel hard done by, here, is if he thinks that rival banks are getting off easier than he is, just because they’ve got less money. That might be the case. But that doesn’t mean he’d be willing to trade places with them.

Comments
6 comments so far | RSS Comments RSS

If I remember correctly, the management at JPMorgan is of legal age and well compensated. They bought banks with their eyes open. The fine, roughly $15-$20,000 human money equivalent (HME) is peanuts.

Yes, a lot of other banks should be paying and paying a lot more, but we generally regard multibillion dollar institutions as fragile flowers incapable of enduring the slightest shock, until homeless schizophrenics, eight year old kids who chose their parents unwisely, people with insufficiently high albedoes and other such hard cases.

If we had simply let ALL the investment houses fail back in ’07 and ’08, we would have rebuilt a robust, actively lending banking sector by the middle of 2010, and we wouldn’t be dealing with these nickle and dime fines now. It’s not as if these organizations are fonts of wisdom or run by exceptionally smart individuals. We should stop pretending that they are.

Posted by Kaleberg | Report as abusive
 

Felix,

” It just implies that weaker banks might also deserve such massive fines as well — and are managing to avoid them only because they have less ability to pay them”

Straw man with a triple pike & somersault. Any data to back this up? Anything?

I’m going with your Door Number One above. Control fraud in the USA’s biggest banks has been decriminalised under the Bush 2 and Obama administrations, and you have reaped what they sowed over the last decade.

And until executives in these brobdingnagian banks face criminal charges and are put away (the Charles Keating* experience) you can expect more of the same.

Thought experiment, Felix: do you include credit unions in your slur towards ‘smaller banks’ emulating JP Morgan Chase’s example above? How about your’s?

If ‘yes’, you’ve just indicted yourself as a director.

* http://en.wikipedia.org/wiki/Charles_Kea ting

Posted by crocodilechuck | Report as abusive
 

I agree with Felix and add these points:
Buying Bear and WaMu included the regulatory and litigation risks. JPM knew the bill would come due some day. Isn’t it better that they at least have the cash to survive the drubbing?
The Whale fines were for inadequately informing the board or the regulators. Why is there any surprise?
And for decades Bernie’s brokerage deposited billions of suckers’ cash into Chase and disbursed billions without buying securities. Every banker knows that turning a blind eye can facilitate money laundering. Why the surprise?
And anyone who gets a speeding ticket says it’s unfair – “everyone else is doing it!” – but if a 17-year-old male sticks his middle finger at the cops while driving a red muscle car with a broken muffler and seven teens enjoying loud hip-hop he too may become a victim of unfairness.
JPM will survive. Let Jamie worry about Jamie.

Posted by StuartG | Report as abusive
 

With enough accounting creativity JP has managed to appear to be taking a beating under the weight of their legal problems? Poor pitiful JP? Is anyone really buying this crap. If JP looks sufficiently downtrodden and recalcitrant regulatory and public opinion will finally loose interest and back off? I say Dimon’s head on a stick at 270 Park Ave. To hell with him ..

Posted by Woltmann | Report as abusive
 

Felix I’d love to hear a rebuttal on either of the following issues:

#1 “weaker banks might also deserve such massive fines as well — and are managing to avoid them only because they have less ability to pay them.I’m fine with this possibility”

That is an admission that you would like to selectively apply the rule of law. Poorly run weak banks with minimal capital get off easy while large strong banks pay up. Where exactly does that path take us Felix?

#2″The bargain would be this: if all those efforts worked, and JP Morgan ended up as a bank making $6 billion per quarter in profits, then at that point it would have to fully atone, with a few quarters’ profits, for its own sins and those of the banks it wanted to acquire. JP Morgan’s solvency and capital adequacy would be guaranteed: it would only face the fines if it was more than capable of paying them. Dimon would have jumped at such a bargain…”

…but that was not the bargain we made was it Felix? We made a different deal didn’t we… as you well know since you did the best job covering it:

http://www.felixsalmon.com/2008/03/open- questions-about-the-jp-morgan-bear-stear ns-deal/

we begged JPM to save Bear didn’t we Felix. Even promised JPM we’d ring fence Bears bad assets didn’t we. Here again you abandon the rule of law. Contracts and agreements can now be unilaterally changed by the government years later can’t they. I sell you some property for a price and terms we mutually agree upon… it seems to me a few years later you’ve gotten the better of me on that deal… so I change the terms on you… how does that taste to you Felix.

You’re better than this buddy…

Posted by y2kurtus | Report as abusive
 

I guess this falls under #1, but JPM has done more damage than is widely recognized. One example comes from the Chase credit card, where fixed rate “for the life of the loan” balance transfers were agressively marketed while the prime rate was MUCH higher than the offered rate. Apparently, the expectation that most would mess up and end up paying the higher rates that come after a mistake. When that did not occur across the board and the prime rate got below the promotional rate, Chase hit the responsible borrowers with a 5% minimum payment.

Perhaps this was Gordon Smith and not Jamie Dimon, but it drove some to bankruptcy. There was a class action settlement but that reaped more reward for attorneys than for those harmed. As one harmed, I have a difficult time fining any fine too large for this company.

Posted by nprfreak | Report as abusive
 

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