JP Morgan Chase (JPM) is close to finalizing a $13 billion agreement to settle most but not all of the ongoing investigations into the bank’s mortgage business, according to reports from over the weekend. But depending on how the deal is written, the bank’s actual liability could be far lower and taxpayers could find themselves subsidizing its payout.
The eye-popping dollar figure, which would be the largest settlement to ever be paid to the federal government, likely paints a misleading picture of what the bank will actually pay. There are at least three crucial factors that could reduce the actual cost to JPM from the deal.
First, the bank is not paying out $13 billion in cash. The settlement reportedly consists of “$9 billion in fines and $4 billion in relief for struggling homeowners.” Banks have successfully manipulated other recent, highly touted settlements requiring “relief for struggling homeowners” in ways that minimize both how much help homeowners get and the penalty banks actually absorb from providing it. Homeowner relief provisions in settlements require banks to demonstrate that they’ve taken actions that benefit distressed borrowers at their own expense, such as forgiving some portion of the outstanding loan amount on thousands of mortgages. But the landmark National Mortgage Settlement left it up to the banks to decide what form of homeowner relief to provide and how to calculate its value, which let the banks count actions they would have taken anyway as part of their settlement “penalty.” Banks were able to game the rules such that short sales, which minimize the losses to a bank without helping struggling homeowners keep their homes, were three times more common than actual principal reduction.
Second, the bank has repeatedly insisted that it is not responsible for settlement costs relating to federally-insured bank units that it bought during the crisis such as Washington Mutual (WaMu), a major player in the mortgage wrongdoing at the core of this weekend’s reported settlement. JPM argues that it shouldn’t be liable for WaMu’s misdeeds, and instead the taxpayer-funded Federal Deposit Insurance Corporation (FDIC) should bear those costs since WaMu was an FDIC-insured bank that had failed at the time JPM bought it. The FDIC has fought that argument in court so far, but “some fear the FDIC, under pressure from the Justice Department to join a global settlement, might agree to assume liability,” the Huffington Post reports. In that event, roughly $3.5 billion of the total fines and homeowner relief expenditures in the settlement would be passed from JPM to the taxpayer.
Third, many regulatory fines are tax deductible. By one estimate, JPM could pass close to $4 billion along to taxpayers thanks to such deductions, further deflating the headline-grabbing $13 billion figure.
JPM has been in negotiations with Justice Department attorneys over the settlement for months. According to the New York Times, the sticking point in those negotiations was the ongoing criminal investigation of JPM’s mortgage finance dealings. U.S. Attorney General Eric Holder wanted any comprehensive settlement to include a guilty plea to criminal charges, while JPM chairman Jamie Dimon wanted the deal to stymie that criminal case, which is being built by California prosecutors. The tentative deal struck over the weekend simply doesn’t address the criminal investigation.
The criminal case could produce a kind of accountability that no civil penalty — even a $13 billion one — can. As the Los Angeles Times’ Michael Hiltzik wrote of the civil fine, “The people who pay it are not the executives who managed the bank to this pass, but the shareholders.” Criminal charges could bring accountability to individual bankers rather than diffusing the costs of JPM’s violations across the firm’s whole balance sheet.
The settlement talks seem to be part of the enforcement push that Holder pledged over the summer, but it is subject to the same weaknesses that have plagued Holder’s financial crisis enforcement efforts throughout the Obama presidency. And regardless of its ultimate size, it will be born by shareholders rather than bankers.