The Justice Department (DOJ) broke the law when it settled mortgage finance market fraud allegations against JP Morgan in a headline-grabbing legal settlement last year, according to a lawsuit filed Monday by the Wall Street reform advocacy group Better Markets.
By granting the bank immunity from further civil suits, Better Markets President Dennis Kelleher said, the DOJ acted “as prosecutor, jury and judge…to the largest, richest, most politically-connected bank on Wall Street.” Kelleher’s group wants judicial review of the facts underlying the settlement to ensure that JP Morgan pays a penalty that is proportional to the bank’s misdeeds, and says that the DOJ’s failure to seek a judge’s independent approval violates the separation of powers required by the Constitution.
The deal between JP Morgan and the DOJ stemmed from allegations that the bank had knowingly misrepresented the quality of mortgage-backed securities that it sold. Since the deal’s on-paper costs evaporate under scrutiny — JPM can write almost the entire thing down on its taxes, costing less than half of what the DOJ claimed — the settlement has drawn a great deal of criticism since it was announced last fall. Better Markets echoed those criticisms in its statement on the lawsuit, accusing the government of “using the large dollar amount to blind everyone to the reality that they have disclosed no meaningful facts about what JP Morgan Chase did.”
That alleged lack of factual disclosure is the central target of the group’s ire. One of the few bright spots in the JP Morgan deal was supposed to be that the bank acknowledged it had done what the government accused it of doing. Since regulators started to seek admissions of wrongdoing in such settlements last year after years of activist and lawmaker frustration with deals that allowed firms to “neither admit nor deny” alleged misdeeds, the news that JP Morgan had formally agreed to the DOJ’s version of events seemed exciting. But the deal didn’t include a full admission of wrongdoing. Instead, JP Morgan agreed to a “statement of facts” of the case. As Bloomberg View’s Jonathan Weil pointed out in November, that statement was carefully worded to avoid providing any useful information to clients, private investors, or homeowners wronged by JP Morgan. “The bank didn’t admit to violating any laws” or “identify any specific people or bonds,” Weil wrote. “For that matter, the Justice Department gave no indication that it would be filing court papers accusing JP Morgan of violating any laws, so its portion of the deal won’t need a judge’s approval.”
Better Markets’ suit is designed to reverse that last failure and force judicial review of the settlement and of the case the DOJ had built prior to winning the bank’s surrender. The bank appears to fear that level of scrutiny. As Better Markets notes in a fact sheet on the lawsuit, the DOJ was reportedly on the verge of filing official charges and taking JP Morgan to court when its CEO Jamie Dimon personally called a top DOJ official four hours before charged would be announced to raise the bank’s settlement offer and keep the matter out of court.
The lawsuit could also have implications for the financial industry as a whole. The JP Morgan deal is supposed to be a template for other Wall Street settlements, meaning that its failures and loopholes would be replicated across the whole industry. Even though bank officials publicly complain about the deal, the reality is that it was a very good resolution to JP Morgan’s problems. If it is derailed, the financial industry will lose its best escape route from real accountability for the multi-trillion-dollar financial crisis.