Justice’s Deceit on the JPMorgan Settlement, and Why Ed DeMarco Should Get Some Apologies

The moral bankruptcy of the Justice Department’s fake crusade against JPMorgan Chase was always fairly obvious, considering that the Attorney General is holding private meetings with Jamie Dimon, the chief potential suspect in a criminal case (hey, at least those talks were “constructive”). Just yesterday, Dimon walked into the White House to meet with the President, afforded the respect of an elder statesman. The idea that he’s under “attack” is absurd.

But this has now burst into the open with Justice’s desire to stick the FDIC with half the bill:

JPMorgan Chase & Co’s possible $11 billion settlement of government mortgage probes has been complicated by a dispute with the Federal Deposit Insurance Corp over responsibility for losses at the former Washington Mutual Inc, said people familiar with the matter [...] 

JPMorgan, which acquired Washington Mutual from the FDIC for $1.9 billion at the height of the financial crisis, has disputed its responsibility to cover losses incurred by investors on the failed thrift’s mortgage securities [...] 

Some fear the FDIC, under pressure from the Justice Department to join a global settlement, might agree to assume liability, a move that would effectively force another government agency to absorb billions of dollars in losses [...] 

“If the FDIC were to indemnify JPM as part of the government deal, it would likely reduce the rumored $11 billion by about $3.5 billion,” said Joshua Rosner, managing director of Graham Fisher, an independent research consultancy. “That would be an absurd outcome.”

It’s worse than Josh says. As reports have noted, $4 billion of that fine goes to “mortgage relief,” allowing JPMorgan to game the rules (as every bank did in the National Mortgage Settlement) to “pay” their fine with other people’s money, get credit for routine actions like bulldozing homes or waiving deficiency judgments, and other “take air out of the books” actions. So the hard money fine is $7 billion. And the FDIC would take on fully HALF of that, despite the fact that, at the time, JPMorgan swore up and down that there would be no federal cost from the WaMu transaction. This is why I bristled a bit at Alex Pareene’s appearance on CNBC (though I like him very much and thought he did well). It was too predicated on JPMorgan paying “the largest financial fine in history,” when this accords way too much respect to the game the Justice Department is playing here.

At some level, this just transfers the fine from JPM shareholders over to taxpayers. But notice that the portion of the fine in dispute, the WaMu holdings, refers to the 2011 FHFA lawsuit over mortgage-backed securities purchases. Earlier we learned that, of the $7 billion hard-money fine, $6 billion comes from that lawsuit.

The Justice Department is leading the mortgage-securities negotiations, which also include the Federal Housing Finance Agency and New York Attorney General Eric Schneiderman. 

The FHFA has asked J.P. Morgan to pay more than $6 billion to settle claims the bank misled mortgage-finance companies Fannie Mae and Freddie Mac about the quality of mortgages it sold to them during the housing boom.

The fact that half of the fine would deal with WaMu’s liability in that FHFA lawsuit confirms that this is the model.

If so, the way in which this is being presented by Justice and the New York AG is remarkable in its deceitfulness. This is supposed to be a “global settlement” on all of JPM’s mortgage-backed securities exposure. In reality, they’re settling the FHFA lawsuit, the one that would be really damaging as a precedent and lead to all sorts of private litigation, and Justice and Schneiderman are piggy-backing their lawsuits on top, for pennies, to attach themselves like barnacles to a big settlement number. This includes Schneiderman’s Bear Stearns lawsuit, DoJ’s investigation over mortgage bond purchases, any misrepresentations to investors, etc. That represents $1 billion of a $7 billion figure.

Moreover, since this is being described as a “global” settlement, you can bet that all the other misconduct will never get a look from DoJ again. That’s the whole point – it’s a “pay for peace” deal. While Jamie Dimon isn’t technically out of the woods – and the presence of a whistleblower inside the company as well as the imminent extradition of Javier Martin-Artajo should make him sweat – in reality, Justice will take a victory lap and forget about JPMorgan Chase for a while. And their vaunted “financial fraud task force” investigation will have amounted to next to nothing – it’s the FHFA case that’s the big kahuna here.

Even if you accept this fine on its own terms as punitive, you have to thank the FHFA for that outcome. And that’s where the “liberal” housing groups who have been savaging Ed DeMarco for years look particularly shameful. There’s no question that DeMarco’s stubbornness against principal reduction has been misguided, but you have to look at the whole picture. As a conservator for Fannie and Freddie, what fits his job title most perfectly is for him to recoup money from banks who swindled the GSEs with their mortgage bonds. And the 2011 lawsuit against 17 banks has quietly yielded fruit. In the past week, Citi paid $395 million to Freddie Mac and Wells Fargo paid Freddie $869 million. Those are over direct mortgage purchases, but it’s on top of several other settlements, both on mortgages and mortgage securities, worth several billion over the years. Even the Justice Department’s civil lawsuit against Bank of America, seen as the first between the government and a mega-bank over what caused the financial crisis, is about mortgages purchased by Fannie and Freddie. The GSEs are profitable now because of their dominance over the mortgage market. But these successful putback cases relieved taxpayers as well.

And while I don’t think much of the $4 billion in mortgage relief in this settlement, if you take it at face value, that’s over twice as much as the benefit to homeowners if DeMarco allowed principal reduction over his preferred option of principal forbearance.

So I’m wondering when liberal housing groups like The New Bottom Line, the Home Defender’s League, The Center for Responsible Lending, the Campaign for a Fair Settlement and more will apologize to Ed DeMarco. I know they’ve called him the “single person holding back the economic recovery,” but his efforts to hold banks who passed bad mortgages to Fannie and Freddie accountable has had a more positive economic impact than anything they’re calling for. Not to mention the fact that creating an actual deterrent for financial fraud by making it unprofitable will do far more to help homeowners than anything else.

I eagerly await the contrite press releases.

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