JPMorgan: Fish Rot from the Head
William K. Black
New Economic Perspectives October 23, 2013
The New York Times’ spin of the tentative settlement of JPMorgan’s latest myriad felonies begins early and runs throughout the article. JPMorgan and Attorney General Eric Holder have reached a common meme on their settlement: the Department of Justice (DOJ) and Holder are stalwarts who have demonstrated their toughness and JPMorgan is a model corporate citizen. The inconvenient facts that the senior officers of JPMorgan, Bear Stearns (Bear), and Washington Mutual’s (WaMu) grew wealthy through the frauds that drove the financial crisis and that JPMorgan’s senior officers will not be prosecuted and will not even have to repay the proceeds of their crimes never appear in the article.
A word of caution is in order: I am discussing an article that is the product of leaks from DOJ and JPMorgan’s press flacks about a tentative deal, so reality is certain to differ from the spin. This article is a longer discussion of the settlement than my October 22, 2013 CNN op ed.
I am writing a side piece on the irony and implications of the civil and criminal investigation led by the U.S. Attorney for Eastern District of California, Benjamin Wagner. The NYT article suggests that his investigation is of former WaMu officers.
WaMu was one of the world’s largest criminal enterprises specializing in making fraudulent liar’s loans and then selling the fraudulent loans to the secondary market through fraudulent “reps and warranties.” These frauds destroyed WaMu. Dimon made the decision to buy WaMu – and to do so without receiving indemnification from the FDIC for any losses JPMorgan might suffer due to WaMu’s massive frauds.
JPMorgan purchased Bear and WaMu very quickly without conducting due diligence but that simply made the need for FDIC indemnification (or retention by the FDIC of Bear and WaMu’s fraud liability) all the more essential given WaMu’s notoriety on Wall Street for originating “liar’s” loans and Bear notoriety that inspired the phrase: “Bear Don’t Care.”
Here’s the NYT’s description of the tentative deal.
“The deal, which the Justice Department took the lead in negotiating and which came together after a Friday night call involving Attorney General Eric H. Holder Jr. and JPMorgan’s chief executive, Jamie Dimon, would resolve an array of state and federal investigations into the bank’s sale of troubled mortgage investments. That type of investment, securities typically backed by subprime home loans, was at the heart of the financial crisis.
While the deal would put those civil cases to rest, it would not save JPMorgan from a parallel criminal inquiry from federal prosecutors in California, the people briefed on the talks said. Under the terms of the preliminary deal, the people said, the bank would also have to assist prosecutors with an investigation into former employees who helped create the mortgage investments.”
The rate of spin accelerates thereafter like an ice skater pulling her outstretched arms inward to hug her body.
“The cost to JPMorgan, the nation’s biggest bank, goes beyond the bottom line. The settlement would deal a reputational blow to the bank and Mr. Dimon, who steered JPMorgan through the crisis without a quarterly loss or major government scuffle. Now Mr. Dimon’s tenure is engulfed in turmoil, the consequence of fighting a multifront battle with federal authorities scrutinizing everything from a $6 billion trading loss in London last year to the bank’s hiring of well-connected employees in China.
In the mortgage case, the size of the penalty underpins its importance. The $13 billion penalty, according to one of the people briefed on the talks, would include about $9 billion in fines and $4 billion in relief for struggling homeowners.
The $13 billion deal, which could still fall apart over issues like how much wrongdoing the bank is willing to acknowledge, would represent something of a reckoning for Wall Street, whose outsize risk taking in the mortgage business nearly toppled the economy in 2008. It might also provide a measure of catharsis to the investing public, which suffered billions of dollars in losses from buying bad mortgage securities.”
To the NYT, and one prays earnestly only the NYT, the “reputational blow” to JPMorgan and Dimon does not come from JPMorgan, Bear, and WaMu committing the largest and most destructive financial crimes in history – but from JPMorgan paying a miniscule percentage of the damage its officers’ frauds caused the world. The settlement does not require its controlling officers who grew wealthy from those crimes to return that wealth. The frauds by JPMorgan’s officers occurred while Dimon was in charge.
As I explained above, Dimon is also the one who thought, without due diligence and in the face of WaMu’s and Bear’s terrible reputation for fraud, that the purchase price from the FDIC was such a steal that JPMorgan should buy Bear and WaMu quickly without an FDIC indemnification lest a competitor snap them up.
Dimon had tried to acquire WaMu at a higher price prior to its collapse in September 2008 but WaMu’s incompetent management refused the deal. That deal also involved no FDIC indemnification and would have proved even more disastrous for JPMorgan. Similarly, Dimon was the proponent of buying Bear at a price he considered a steal – without any FDIC indemnification provision. Nevertheless, the NYT continues to portray Dimon as a genius.
The NYT article repeats Dimon’s claim that it is “unfair” to sue JPMorgan, which acquired Bear’s assets and liabilities, without any indemnification agreement, for its liabilities. The article presents no contrary view or facts. If Dimon had demanded an indemnification agreement JPMorgan would have had to pay a far higher price to acquire Bear Stearns and WaMu. He cannot choose to take the lower price and then claim that it unfair to follow the normal rule that a firm’s liabilities do not disappear because it is acquired by another firm.
I am, of course, kidding. Dimon can and does choose to take the lower price and claim that it is an outrage to hold JPMorgan liable. Despite the fact that Dimon’s claim is the actual outrage Holder is reported to have fallen for it.
The NYT account is so delusional that it thinks that it speaks well of Dimon that he “steered JPMorgan through the crisis without a quarterly loss or major government scuffle.” Hint: many of JP Morgan’s frauds helped it avoid reporting “a quarterly loss.” The fact that regulation had been so effectively destroyed by its anti-regulatory leaders and lobbying from the big banks, including JPMorgan, that they never even “scuffle[d]” with JPMorgan despite its thousands of felonies is why Dimon was celebrated for years for leading what was in reality a criminal enterprise instead of being denounced. Why does the NYT treat Dimon’s “multifront battle” against the regulators who are (finally) trying to clean up the cesspool that is JPMorgan as valiant? Dimon needed to fight a “multifront battle” against the elite fraudsters he promoted, praised, and protected from justice rather than a “multifront battle” against the laggardly and none to tenacious regulators who finally stumbled over the frauds and sought to end them.
Dimon is trying desperately to ensure that JPMorgan’s senior officers, particularly Jamie Dimon, will be able to retain their positions, power, and immense wealth that are the product of the manifold frauds the senior officers led. He is enthusiastically offering the shareholders’ money – not his – to buy “indulgences” for him and his senior cadre. The “$9.2 billion” in legal fees that JPMorgan expects to pay is largely a device to provide free legal representation to the senior officers. These practices are disgusting, not noble.
The settlement with DOJ is a $9 billion (before taxes – probably far less after taxes) deal, not $13 billion. The $4 billion in purported “relief for struggling homeowners” reprises the cynical misrepresentation of the foreclosure fraud settlement in which the banks and DOJ agreed to call loan workouts that the banks would have done anyway because they minimized losses to the banks “relief for struggling homeowners.” The NYT reporters have seen this propaganda before, but they parrot it again as if it were indisputable fact. Nine billion dollars is a large number, but relative to the damage JPMorgan’s frauds caused it is miniscule – and that is without taking into account the fact that under normal remedies for repeated acts of fraud, and the remedies available under RICO, the DOJ could have trebled those damages. The $9 billion figure is not a testament to DOJ’s toughness but a (dramatically understated) demonstration of the catastrophic damage JPMorgan, Bear’s, and WaMu’s senior officers caused our Nation and much of the world.
The concluding sentences of the quoted passage demonstrate again the NYT’s failure to understand the role that “accounting control fraud” played in driving the crisis and the appropriate criminal justice response to elite frauds. The reporters claim that not prosecuting JPMorgan or its senior officers or clawing back their wealth will:
“represent something of a reckoning for Wall Street, whose outsize risk taking in the mortgage business nearly toppled the economy in 2008. It might also provide a measure of catharsis to the investing public, which suffered billions of dollars in losses from buying bad mortgage securities.”
The DOJ indulgences deal represents the continuing non-reckoning for Wall Street’s senior officers. We need to begin with the cause of the crisis, which was not “outsize risk taking in the mortgage business.” Accounting control fraud represents a “sure thing” – as Jamie Dimon explained in his March 30, 2012 letter to JPMorgan’s shareholders: “Low-quality revenue is easy to produce, particularly in financial services. Poorly underwritten loans represent income today and losses tomorrow.”
To be more precise, poorly underwritten loans represent fictional reported “income today and [real] losses tomorrow.” George Akerlof and Paul Romer made the same point in their 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”).
“[M]any economists still [do] not understand that a combination of circumstances in the 1980s made it very easy to loot a [bank] with little risk of prosecution. Once this is clear, it becomes obvious that high-risk strategies that would pay off only in some states of the world were only for the timid. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution?” (Akerlof & Romer 1993: 4-5).
The reporters are correct that mortgage purchasers lost “billions” of dollars (if we clarify that to mean “hundreds of billions”) – and that their recoveries will be a small fraction of those losses because if the fraudulent mortgage originators and fraudulent sellers of mortgage products (MBS and CDOs) “backed” by those fraudulent loans were made whole for their losses dozens of the world’s largest banks would fail. JPMorgan’s shareholders may suffer some loss, but the elite perpetrators, the senior officers, whose frauds made them wealthy and caused the crisis will not be prosecuted and will not have their wealth “clawed-back.” Why exactly the NYT believes the public should find such a result “cathartic” is beyond me.
The NYT article then asserts its meme of DOJ toughness, again as “fact.”
“But the bank, one of the people briefed on the talks said, tentatively backed down from that demand [that the government not be allowed to investigate or prosecute a subset of its felonies] , a major victory for the government and one that allows the Justice Department to pursue its criminal investigation of JPMorgan.”
Yes, that is how far the “Justice” Department has fallen – it claims to reporters (who then regurgitate the meme as unassailable “facts”) that DOJ has scored “a major victory” because JPMorgan is “allow[ing]” DOJ to investigate its crimes. Two news flashes to Holder and the NYT – DOJ does not need JPMorgan’s permission to investigate and prosecute JPMorgan and the necessary implication of the story is that the DOJ has only preserved the right to investigate and prosecute this one subset of JPMorgan’s myriad felonies. For tens of thousands of JPMorgan felonies the deal will remove the DOJ’s authority to investigate and prosecute. This passage from the article must also be read in conjunctions with this earlier segment.
“Under the terms of the preliminary deal, the people said, the bank would also have to assist prosecutors with an investigation into former employees who helped create the mortgage investments.”
As white-collar criminologists we joke about “the vice president in charge of going to jail.” DOJ, for example, is prosecuting two minnows involving the London Whale frauds. (Notice that the article strips away any reference to the frauds and simply notes a “$6 billion trading loss.”) The minnows’ unpardonable crime is that they lost money and reduced Jamie Dimon’s bonus and that they did so at an inconvenient time when Dimon’s lobbyists were about to gut the “Volcker rule” barring proprietary trading. The inconvenient fact is that Dimon has turned JPMorgan into the largest proprietary trading operation in history (in violation of the everything the Volcker rule was intended to accomplish) and the London Whale’s losses demonstrated that Volcker was right and Dimon was wrong.
But did you notice the key word: “former?” It appears that DOJ isn’t even willing to prosecute currently employed minnows in connection with the sales of tens of billions of dollars of fraudulent loans through fraudulent reps and warranties. If the article is accurate, DOJ is only investigating “former employees.” Any meme that aims to make Holder heroic is bound to collapse in farce.
Consider what these deals that stop investigations mean, particularly because they have been the norm in response to this crisis. Dimon’s goals in priority order are: (1) avoid prosecution, (2) keep his wealth, (3) keep his job, and (4) prevent any investigation that makes public the facts of JPMorgan’s, and its senior officers’ frauds. Dimon and his peers are desperate to avoid what happened when we investigated prosecuted the elite S&L frauds. Every civil action, enforcement action, and prosecution put facts in the public record that journalists could freely cite without fear of being sued for libel or slander. Those facts demonstrated widespread fraud by elites. As the public came to understand these facts their view of the nature of the S&L debacle, which had been crafted by the CEOs, business reporters, and economists as the same “outsize risk taking” meme that is dominant today changed. The public realized that the control frauds used accounting fraud as their “weapon of choice” to produce a “sure thing” and avoid having to win a risky gamble. The political contributions that the S&L control frauds used to curry political allies to counter-attack us as regulators for daring to re-regulate the industry and hold them accountable for their crimes became an embarrassment for their politicians. Elected officials rushed to donate to charity political contributions they had received from fraudulent S&Ls. The elite frauds’ greatest strength, their political influence, became a liability.
As regulators, we knew we had won when Representative Frank Annunzio, one of the most vociferous allies of the worst frauds began wearing a button that was six inches in diameter and read: “Jail the S&L Crooks!” It was totally cynical on his part, of course, but it proved how much our investigations and efforts to hold the elite frauds accountable had changed the political dynamics. We didn’t simply reduce the effectiveness of what had been the elite frauds’ greatest strength – we turned their political contributions into a crippling liability. This all came at a price. Many of us still bear the scar tissue, but we would all do it again.
Dimon and his peers are not stupid. They realize that even the NYT reporters will turn on them with a vengeance if competent investigations are ever conducted and the findings made public about the hundreds of fraudulent lenders whose literally millions of frauds drove the crisis. The CEOs’ paramount strategic objective is to prevent real investigations staffed by vigorous financial regulators working with FBI agents that lead to hundreds of grand jury investigations of elite bankers and civil suits, enforcement actions, and prosecutions that make public the facts about the elite frauds that drove the crisis. The elite bankers and their political lackeys’ greatest fear is that the public will learn the facts about the fraud epidemics that drove the crisis. One testament to this fear is indirectly, and unintentionally, revealed by the NYT article.
“But some public interest groups continue to question why no top Wall Street executives have been charged criminally for the risky acts that triggered the crisis. The government also prefers to settle with big companies rather indict them, fearing that criminal charges could unnerve the broader economy.”
Why doesn’t the NYT “question why no top Wall Street executives have been charged criminally for the [criminal, not “risky”] acts that triggered the crisis? One would think that this is precisely the kind of question that a great paper would ask even if it was the dominant home town industry’s elite leaders that were most culpable. Recall that the fact that, for example, the FHFA in its capacity as conservator for Fannie and Freddie lacks the legal authority to prosecute does not reduce the significance of the fact that its investigations demonstrated endemic fraud in sales of fraudulent mortgages to Fannie and Freddie through fraudulent reps and warranties. Fraud is criminal even if Holder is too spineless to prosecute it. The NYT refuses to play it straight, which is why it uses the phrase “risky acts” rather than the word that (far from vigorous) government investigators have repeatedly used to describe their findings – “fraudulent.” Again, it implicitly asserts as if it were undisputed fact that the crisis was driven by “risky [non-criminal] acts. “ The NYT article is so cravenly bowdlerized that it never uses the word “fraud.” I do not think the reporters would dare to expunge the word that is essential to understand the central public policy issue relevant to the article if Holder and his flacks were using the “f” word and expressing moral outrage that America’s largest bank was a criminal enterprise that committed tens of thousands of frauds over the course of at least a decade.
But the NYT far outperforms its standards for sycophancy in this passage:
“Mr. Dimon has called the lawsuit unfair, arguing that JPMorgan should not be penalized for buying Bear Stearns.
Yet JPMorgan’s board, faced with regulatory problems, one more vexing than the next, is eager to strike a conciliatory stance. Toward that end, the bank’s board approved the payment of about $1 billion in fines to government authorities so it could resolve investigations into the trading loss in London and an inquiry into the bank’s credit card products.”
I’ve explained why it is not “unfair” to sue JPMorgan for Bear’s frauds. What is “unfair” is that the article provides no response of Dimon’s claim of unfairness.
It is the portrayal of “JPMorgan’s board,” however, as “conciliatory” that raises the article into an altered state of transcendent sycophancy. In any sane world the banking regulators would have demanded the resignation of JPMorgan’s board years ago for their failure to exercise their fiduciary duties. On their watch, JPMorgan has become one of the largest and most destructive criminal enterprises in history and the Board has praised and protected Dimon rather than firing him and replacing him with a CEO who would create “an ethical tone at the top.”
JPMorgan is getting away with tens of thousands of frauds that made its senior officers wealthy and helped drive the financial crisis without any prosecutions of the corporation or its senior officers. Its board should be praying to whatever gods they worship in thanksgiving that Holder is the spineless Attorney General willing to sell the modern indulgences that give senior Wall Street officers and their banks immunity from prosecution and allow them to keep the wealth they gained from their frauds. The NYT has achieved epic levels of unintentional self-parody with its claim that it is JPMorgan’s board that is “conciliatory” in being willing to use the shareholders’ money to pay over $9 billion in additional legal and investigative fees and $9 billion in fines as the purchase price of the indulgence to ensure that none of the culpable senior officers are held accountable for their crimes or are stripped of their fraudulent proceeds.
Could someone remind me whether the $18+ billion in shareholder money spent to protect the senior officers from accountability is being paid to meet the bank’s fiduciary duty of loyalty or its fiduciary duty of care to its officers? I’m having some difficulty formulating my question because I am so ancient that my obviously faulty memory was that it was the officers and board members who owed fiduciary duties to the bank and its shareholders. Dimon and the board members he selects and dominates demonstrate through their actions that they believe that the bank exists to enrich them.
The article commiserates with JPMorgan’s board because it is purportedly faced with “vexing” “regulatory problems” about a “trading loss” and an “inquiry into the bank’s credit card products.” Yes, how “vexing” it must be for the poor board. It would probably be even more “vexing” if the board were to eschew euphemisms and instead describe its real “problems” which are not “regulatory” but the serial commission of massive frauds. JPMorgan’s fraud “problems” were created by JPMorgan either directly or through purchases of two notorious control frauds (Bear and WaMu) that it knowingly made without indemnification and with the approval of JPMorgan’s board. JPMorgan’s problems are recurrent frauds led or induced through perverse compensation systems created by JPMorgan’s (and Bear’s and WaMu’s) senior officers.
JPMorgan officers violated multiple laws in covering up the London Whale’s trading losses. The other nine areas of massive felonies (that according to an earlier Wall Street Journal story are also part of the deal) are also “problems” not because of regulations but because of laws and standards of ethics. These ten (and growing) areas of criminality would have led any functional board – years ago – to fire Dimon and institute an immediate top to bottom scrub to find the problems, fix them, “claw back” the officers’ compensation, fire the leaders of the frauds, remove the perverse compensation systems, prevent insane acquisitions of control frauds like Bear and WaMu, make criminal referrals against the officers and employees who committed the frauds, and vigorously aid the prosecution of those officers and employees. JPMorgan’s board has repeatedly failed to take these actions. It cannot even bring itself to vote to remove Dimon as Chairman and appoint an independent Chairman who would reduce Dimon’s disastrous domination of JPMorgan.
Fish rot from the head – and JPMorgan is rotten. The inability of the NYT to smell the stink after ten disclosures of large scale JPMorgan fraud schemes raises the question: how many frauds are JPMorgan allowed to commit before the New York Times is willing to use the “f” word? Of course, the same facts show that the rot at DOJ emanates from Holder.