Come tax time, JP Morgan Chase (JPM) will be able to deduct the entirety of a $5.1 billion settlement over its mortgage business practices that was announced on Friday. The deduction could knock $1.5 billion off the bank’s tax bill, and the settlement appears to leave the door open for much of the total payment to be passed off onto the Federal Deposit Insurance Corporation (FDIC).
The deal unveiled on Friday is structured as a payment to the Federal Housing Finance Agency (FHFA), rather than “classified as fines or penalties, which typically can’t be deducted” on a company’s taxes, the Wall Street Journal reported Tuesday. As a result, the bank could pass almost a third of the cost of the deal onto taxpayers. The Journal notes that the bank hasn’t said whether or not it will take the deduction to which it is legally entitled, but as a public company JPM has a duty to its shareholders to minimize its taxes and maximize its profits.
The other major flaw with Friday’s settlement is that it leaves room for JPM to pass a substantial portion of its payment to the FHFA off onto another government agency. The FDIC is in charge of a $2.7 billion receivership fund created when Washington Mutual (WaMu) failed, which is intended to repay people harmed by WaMu’s failure, and JPM has made claims to those funds in the past. The settlement announced Friday relates primarily to JPM’s own misdeeds, but some of the mortgage market abuses were conducted by WaMu — which JPM bought in 2008, a purchase that’s made the bank billions of dollars since — so without a specific prohibition in the deal, critics had warned that JPM would seek to tap those FDIC funds to pay for part of the total sum. A provision on page 10 of the deal seems to hint at a ban on such action by the bank, but the way it is worded allows it to pursue compensation from the FDIC’s receivership fund. In response to an inquiry about whether the settlement permits that action, an FDIC spokesman told ThinkProgress that the agency “has no comment,” and two representatives of the FHFA declined to respond to emails and phone calls seeking comment. The American Banker labeled the deal “a kind of, sort of victory” for the bank.
Friday’s settlement is a subset of the larger $13 billion package that has made headlines in recent weeks. But the real cost of the deal to JPM would be much less than what the headlines reported unless it were very carefully written, as ThinkProgress wrote when reports of a finalized settlement surfaced. The details of Friday’s agreement reveal those fears have realized in the initial $5.1 billion settlement. While the larger deal is apparently in jeopardy, this portion will remain in effect even if the overall framework crumbles.