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Why JPMorgan May Be Getting Off Easy

Last Friday JPMorgan Chase reached a tentative $13 billion settlement with federal prosecutors for its alleged manipulation of mortgage securities, which helped trigger the Great Recession.

Part of the Series

BILL MOYERS: Welcome. You couldn’t miss it here in Manhattan the other day — the big, bold headline across the front page of the tabloid New York Post screaming one of those sick, slick lies that are a trademark of Rupert Murdoch’s right wing media empire. There was Uncle Sam, brandishing a revolver and wearing a burglar’s mask. “Uncle Scam,” the headline shouted. “US Robs Bank of $13 [Billion].”

Say what? That, my friends, is pure whitewash, and Murdoch’s minions know it. That $13 billion is the settlement the country’s biggest bank is negotiating with the government to settle its own rip-off of American home owners and investors — those shady practices that five years ago helped trigger the financial meltdown, including manipulating mortgages and sending millions of Americans into bankruptcy or foreclosure.

And this isn’t the only scandal JPMorgan Chase is juggling. A $6 billion settlement with institutional investors is in the works and criminal charges may still be filed in California. The bank is under investigation on so many fronts it’s hard to keep them sorted out – everything from the deceptive sales in its credit card unit to Bernie Madoff’s Ponzi scheme to the criminal manipulation of energy markets and the bribing of Chinese officials.

Nor is JPMorgan Chase the only culprit under scrutiny. Bank of America was found guilty just this week of civil fraud, and eight other banks are being investigated by the government for mortgage fraud. No wonder Wall Street’s camp followers at Fox News, The Wall Street Journal, CNBC and other cheerleaders have ganged up to whitewash the banks. This could be the biggest egg yet across the smug face of unfettered, unchecked, unaccountable capitalism. Let’s sort this out with someone who covers Wall Street without fear, favor or flaming headlines. Gretchen Morgenson has been called “The Most Important Financial Journalist of Her Generation.” She won the Pulitzer Prize for her tough journalism and her Fair Game column for The New York Times combines old fashioned, shoe leather reporting with hard-won knowledge to help the rest of us understand finance both high and low. I recommend her most recent book, written with Joshua Rosner, Reckless Endangerment.

Welcome back.

GRETCHEN MORGENSON: Thank you so much, Bill.

BILL MOYERS: Is the Justice Department finally getting tough on the banks?

GRETCHEN MORGENSON: I find it hard to use this $13 billion settlement number that JPMorgan Chase is entertaining as evidence of the Justice Department being tough on Wall Street. If the Justice Department were being tough on Wall Street, they would be bringing criminal cases. They would not be talking about settlements. They would be talking about bringing criminal cases against individuals who helped to perpetrate this immense crisis.

So to say that $13 billion is finally the Justice Department’s getting religion, I’m just not a buyer of that. $13 billion sounds like a lot of money, but to JPMorgan Chase who over the past five years has made $75 billion, that net income, he doesn’t want to part with it, believe me, but it’s not a huge number.

Particularly if you were to look at what the cents on the dollar is of what they’re paying to get out of these liabilities. You know, people who lost money in these mortgages, the people who lost their homes are, you know, the numbers are far larger than $13 billion. This is a number that has been struck as part of a deal that, you know, may or may not be agreeable to most of the parties at the table. But it’s not a killer number.

BILL MOYERS: The Wall Street Journal and others are saying that what the government is doing is a witch hunt. They’re shaking down JPMorgan.

GRETCHEN MORGENSON: There’s no doubt that there was wrongdoing. They wouldn’t be at the table negotiating if there was no wrongdoing.

And it’s just a matter of what price each party is willing to pay or receive. So a shakedown to me would seem that JPMorgan was innocent of any of the accusations. And we know that not to be true because of what has come out in the private litigation, because of what we’ve seen in the courts so far.

BILL MOYERS: Defenders of JPMorgan and of Jamie Dimon will say there were no criminal cases because there were no crimes. These guys were bending the rules just a little bit. That’s the way the game goes.

GRETCHEN MORGENSON: Eric Holder in fact has said that. You know, their behavior was amoral, their behavior as ugly, you know, but perhaps it wasn’t criminal. Well, I don’t know about you, Bill, but I don’t really have the confidence that the Justice Department did a sufficient investigation to be able to determine whether it was criminal behavior.

Do you feel certain that they did the, you know, job that was needed to say, “Look, we have gone through all these many institutions that hurt so many people, that brought the economy to its knees, and we’ve determined through our thorough investigation that there were no crimes,” I don’t think there was a thorough investigation.

BILL MOYERS: Well, you wrote the other day that the federal judges seem to be losing patience with the banks. How so?

GRETCHEN MORGENSON: There were a couple of cases that I highlighted because I thought it did show a new direction, a new sort of aggressiveness. You know, a lot of these judges — bankruptcy judges in particular who have to see the bank’s treatment of homeowners who’ve filed personal bankruptcy, they seem to really be getting fed up with some of the tactics that these — the hardball tactics that the bank’s litigants, you know, are doing in their courtroom.

They’ve had to witness so many cases of banks running roughshod over borrowers whether it’s by the banks not producing the documentation that proves that they own the note underlying the property, whether they produced erroneous figures about what the borrower owed.

I mean, they have just seen chapter and verse over the last five years of really bad behavior by these banks. And I think it’s finally getting to them where they’re saying, “Look, we used to be sort of a believer or we would take the creditor’s point of view. Now we’re starting to wonder about that and really take the borrower’s side.”

BILL MOYERS: Bank of America was found guilty this week of civil fraud. Is it conceivable to you that Jamie Dimon of JPMorgan could be negotiating with the Justice Department because he doesn’t want to go to a trial by jury in which the bank would be found guilty?

GRETCHEN MORGENSON: I don’t think any financial institution, Bill, wants to go before a jury nowadays. I’m sure you meet people every day as I hear from them every day about how upset they are, disturbed they are by what they’ve seen in their own, you know, lives, what the banks have done. So I do believe that no financial institution wants to have any of this aired before a jury.

BILL MOYERS: I actually talked to a man on the street this morning on, it was a man in the subway and he said to me, “You know, I try to follow this, but it’s so complicated. These issues are so arcane, the eyes glaze over.” What would you say to him about why he should keep trying to pay attention? What are the stakes for people like that?

GRETCHEN MORGENSON: I think what this really underscores is two things. One is that we are still in a situation where these large financial institutions are just too big to manage and they are still threatening the populace.

We have really not fixed “too big to fail.” And so until we do, until these institutions can no longer threaten the taxpayer with a possible bailout, then that’s something that people really need to watch and care about. But the other thing that I think this underscores is the degree to which these large financial institutions lost their way in the years leading up to the crisis.

You know, finance at its best should be positive, it should be something that helps people. Whether it’s helping companies hire more workers to produce, you know, something that people want to buy, whether it’s helping homeowners to get a home and to keep the home, you know, not to have an exploding interest rate that they can’t afford. Constructive finance, right. What we saw and what this $13 billion also indicates is the destructive nature of finance in the early 2000s and continuing.

I mean, the idea of putting together a mortgage security that was, you know, designed to collapse in pieces, in a heap, you know, is just a new low in my view. It is not constructive, that’s not constructive finance.

BILL MOYERS: We had Goldman Sachs and others who were playing their own customers off—


BILL MOYERS: —against each other, putting the interests of the institution, the executives and the managers ahead of their clients.

GRETCHEN MORGENSON: I call it “me-first”-ism. I mean, and you see it just all over the place. So I think that’s what we really need to take away from this. And you know, people can dispute whether $13 billion is enough or whether JPMorgan and Jamie Dimon should feel — that we should feel sorry for them because they have to pay this amount. By the way, the shareholders are paying it, not Jamie Dimon. Nobody is paying for it who actually, on the scene of these particular bad acts, remember.

So instead of focusing on the number, whether it’s fair, whether the government is picking on JPMorgan, I think we just want to step back and say, “Look, this is an indication of what went wrong, how it went off the rails. And we can’t let it happen again.”

BILL MOYERS: It strikes some people that JPMorgan, Jamie Dimon, the board, the directors, the top executives are using other people’s money, the shareholders’ money to buy a get out of jail free pass or to hide their own misconduct.

GRETCHEN MORGENSON: Well, it certainly is true that none of top executives are paying the price for any of these mortgage infractions. They certainly weren’t paying the price for the $6 billion loss in the so-called London Whale episode.

In that episode there was manipulation of the market by the traders at JPMorgan to try to, you know, help their position because it was going so wrong for them.

Now, Jamie Dimon didn’t take a bonus last year, and that was, you know, talked about as, you know, punishment for not having managed properly this $6 billion problem. But you know, it really does not become accountable, you’re not accountable if you don’t have to pay the price for some of this behavior.

BILL MOYERS: Do you find it remarkable, Jamie Dimon asking for a personal meeting with the Attorney General Eric Holder to decide in private on a penalty? Michael Hirsh in the National Journal calls it a personal summit meeting. And he goes on to say that these negotiations “would only have been possible if the government of the United States is itself afraid of disturbing the operations of the bank,” that as you have said, the attorney general himself thinks JPMorgan is indeed too big to fail.

GRETCHEN MORGENSON: It seems unusual to me. And it does smack of favoritism, special treatment. It certainly was unusual I would say for Eric Holder, the attorney general of the United States of America to have a personal meeting with someone that his office is negotiating a settlement with. That raised eyebrows with me. I know I wouldn’t be able to get that meeting if I asked—


GRETCHEN MORGENSON: And if I implored: no. So I mean, I think it really sends a signal also which is disturbing that, you know, again two sets of rules in America, there’s one set for the people who are in positions of power, certainly in the financial world one set of rules perhaps for them, one set for the rest of us.

You know, I really don’t understand why Eric Holder could, you know, would not have decided that it was the optics just didn’t look that good for him to meet with Jamie Dimon. But maybe there’s something behind it that I don’t know.

BILL MOYERS: Well, as you know settlements by their very nature benefit both parties to some degree. What do you think JPMorgan is getting out of this?

GRETCHEN MORGENSON: Well, they get this PR out there that, you know, this is a huge number and that they’re beleaguered, you know, bank.

But what they do get out of it in some cases is tax deductibility. Certain aspects of settlements are tax deductible. And they can use that as a negotiating chip for the entire settlement if the Justice Department allows it. So we’re not clear yet on how much of this will be tax deductible. That would certainly be a benefit to JPMorgan Chase. And it would mean that the taxpayers are once again subsidizing this very profitable large institution.

Also there’s a sense that, you know, maybe we can put this behind us, we’ve paid the freight, we are— we’ve been held accountable. But again the problem with that argument is that it is the shareholders who are being held accountable, paying the price, not the actually perpetrators.

BILL MOYERS: What I hear you saying is that the wrongdoing at JPMorgan what I hear you saying is that the wrongdoing at JPMorgan, Jamie Dimon’s own failure to manage the offenses created by other executives and by traders and all of that, all of that cost or much of that cost is being passed down to taxpayers and shareholders?

GRETCHEN MORGENSON: Yes, that’s correct.

BILL MOYERS: That doesn’t seem fair.

GRETCHEN MORGENSON: Well, that’s our system unfortunately. Now, the Justice Department can say, “No, we will not allow any of this to be tax deductible.” The tax rules do require that any kind of remuneration to say investors who were hurt in their mortgage securities or borrowers who are being given some sort of dispensation for the maybe abusive tactics of the bank, that will automatically be tax deductible. So there is some element of it that, you know, is off limits, it really must. But I think that when you start to do the math and you see who’s actually paying the price, it really is making the wrong people pay.

BILL MOYERS: As you know, Dimon has his defenders, and they’re all giving him a pass because as someone said, the company is a cash-generating machine. You can get away with these things as long as you’re producing a big profit, right?

GRETCHEN MORGENSON: Well, that’s typically been the answer. And it explains away multiple sins, as you know, Bill, such as overly-paid chief executive officers. As long as the company is making money, the millions that they take home every year doesn’t really bother people. That is there is something wrong with that argument.

Also there’s a lot of defenders saying, “Look, a lot of this $13 billion was the result of Jamie Dimon’s purchase of Washington Mutual in the heat of the crisis, 2008, September, or/and its purchase of Bear Stearns, March 2008.” And so really it’s not the bad behavior of JPMorgan, it’s that he took on the liabilities of these two rogue enterprises, and so now he’s paying the price. But he received a tremendous amount, number of benefits by acquiring both of these companies in essentially a fire sale.

I think they had a $2 billion benefit immediately from the purchase of WaMu. And in the purchase of Bear Stearns they got a beautiful almost brand new building on Madison Avenue. So you know, I don’t think that you can simply say that because much of the $13 billion has to do with these two enterprises that Mr. Dimon purchased in the fire sale that that means that it’s really not a net benefit for him.

BILL MOYERS: He didn’t do it as charity, he did it because he calculated it would be a very good business investment?

GRETCHEN MORGENSON: Correct, correct.

BILL MOYERS: So help my audience understand why the directors and the managers don’t have to cough up.

GRETCHEN MORGENSON: You know, it’s what should we call it, the $64 trillion question? You know, you have shareholders who are accepting the status quo with, you know, they’re fine with it.

You can’t have change until you have the owners start to pick up the pitchforks and say, “I am not going to stand for this anymore. Someone has to be held accountable.” We haven’t seen that yet. And so the question is why. Well, is it because you have these large institutions such as the mutual fund organizations that don’t want to rock the boat?

It’s my money, it’s your money that their managing. I might like them to rock the boat, but they choose not to, perhaps, because of their financial relationships with the institutions whose shares they own on my behalf. So there are many questions as to why shareholders have been so complacent about these directors. It’s a real dysfunctional system all around. And until shareholders start to take action and, you know, say, “Look, we want accountability in the boardroom,”

And until you have people inside these organizations standing up and saying, “You know, I would rather be in a business that provides constructive finance for people rather than saying, “Ooh, look at the profits in this kind of, you know, creepy thing that we could construct and sell to people without them knowing it,'” until you have people on the inside who take that issue and say, “I want to be in the business of helping people, not hurting them,” how is it going to change?

BILL MOYERS: Gretchen Morgenson, thank you very much for joining me.

GRETCHEN MORGENSON: Oh, always a pleasure, Bill.

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