J.P. Morgan is the large bank that probably gained the most in terms of size, scope, and reputation from the housing and mortgage market collapses and subsequent financial chaos. As a big firm that had unwound most of its exposure to the housing market unusually early, it was in a position to grow as other institutions failed. Except over the past year and a half it's been sucked into an increasing whirlwind of litigation, revealing that its success has been built in part on a culture of very lax compliance with the law all across the board.
Today many papers have stories reporting (NYT, FT, WSJ) that the bank is about to settle one class of these lawsuits—brought primarily by state attorneys general, and charging the bank with fraudulent sales of mortgage-backed securities to investors. The numbers being tossed around seem to be $7 billion in cash payments plus $4 billion worth of mortgage relief. But these talks aren't quite done yet because there's still disagreement on the crucial issue of culpability. There's been a drive lately to try to force corporate defendants to admit guilt in these settlement arrangements and Morgan doesn't like the idea.
They don't like the idea of admitting guilt in part because there's so many more legal efforts against them at the moment. Massachusetts is investigating their debt collection practices, the Securities and Exchange Commission is investigating them for violating laws against bribery, and the CFTC is looking into whether the London Whale trades violated market manipulation rules.
Those newish investigations all draw strength from recent fines Morgan has already paid, including nearly a $1 billion related to the London Whale episode, modest fines over deceptive credit card billing, and $410 million in fines from the Federal Electricity Regulatory Commission for manipulative bidding practies.
The problem Morgan is running into is that right now instead of settlements cauterizing investigations and letting the company move on with its life, each investigation seems to spawn new investigations. The company has attracted an apparently well-deserved reputation for breaking lots of rules. Its primarily regulator is the notoriously lax Office of the Comptroller of Currency, but in the American system of overlapping regulatory authority that only means that now that the cat is out of the bag everyone who's interested in snagging some enforcement wins knows which bank to look at. If they are made to actually admit wrongdoing in the mortgage-backed securities case, that'll add fuel to the fire. Private litigation efforts will be boosted, and it will strengthen the resolve of these other regulators looking at the bank.
I wrote back in January that I thought in Obama's second term the time was right for a much stricter regulatory crackdown on scofflaw banks, and I think subsequent events have borne that out. Policymakers are no longer so worried about provoking a financial panic that they're disinclined to play hardball on enforcement actions.
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