Nothing like having a credulous, leak-dependent media to carry your messages.
There’s been a remarkable hue and cry about the pending JP Morgan settlement, as if the amount is somehow too high. As we’ve discussed repeatedly, the director of financial stability for the Bank of England, Andrew Haldane, already ascertained that a mere 1/20th of low-end estimate of what the banks ought to pay for all the damage they did would wipe our their market capitalization. So even if you think JP Morgan is only half as culpable as other banks (a point we will debunk in a post tomorrow) it would only be half as dead.
In other words, Dimon and all his crew should thank their lucky stars that they got off so well and didn’t have their banks turned into utilities. But that moment passed, so now we are haggling over price with ingrates.
The overwhelming cost of the settlement is representation and warranty liability. There are well established parameters for that. Once the settlement is final and terms are disclosed, we should have a clearer idea of what JPM paid relative to the dollar value of loans at issue. But the idea that JP Morgan would pay more than the prevailing rate is spurious. There would be every incentive for the bank to fight in court otherwise. As a New York Times story by Peter Eavis and Ben Protess points out:
The largest sum, more than $6 billion, will serve as compensation for investors like pension funds that suffered losses from mortgage securities sold by JPMorgan, Bear Stearns and Washington Mutual, people briefed on the settlement talks said.
And remember, JP Morgan is likely to try to stick the FDIC for the WaMu loans, and the estimates are that that could be as much as $3.5 billion.
And then we have the $4 billion in borrower relief, which as we stressed is junk credits with little economic value:
Another $4 billion will take the form of relief for struggling homeowners in cities like Detroit. The payout will serve as penance for the bank’s general mortgage practices, and does not stem from any particular mortgage securities or institution, according to one of the people briefed on the talks.
I would bet “general mortgage practices” = predatory servicing.
Oh another “the Feds are being mean to JP Morgan” canard is the idea that the bank was being fined for conduct of Bear and WaMu, after it was so
greedy gracious as to rescue them. Even the Financial Times editorial goes off on an embarrassing rant based on a completely erroneous assumptions here (as well as on the significance of the rep and warranty component of the total). Well, that’s not true either:
The remaining $2 billion to $3 billion will represent the only fine in the case, according to the people briefed on the talks. That fine, from federal prosecutors in Sacramento, involves a civil investigation into mortgage securities that JPMorgan itself sold in the run-up to the financial crisis. Despite the concerns that JPMorgan was being unfairly taken to task for the practices of Bear Stearns and Washington Mutual, investigations into the two firms are not expected to lead to any fines. Justice Department lawyers, one person said, decided against allocating fines to those firms because doing so might appear punitive.
Translation: Jamie Dimon, one of the most experienced financial acquirers on Wall Street, neglected to get a waiver for liability for bad mortgage origination practices from two known predatory originators. But he bullshitted his way out of that lapse after the fact.
Now why is the press running these “Oh, JP Morgan is being maltreated” disinformation pieces (aside from the obvious, that the bank is calling in favors?). First, the false idea that the government was overreaching means that those big numbers were supposedly not Dimon’s fault. Second, the Administration has every reason to quietly promote this PR campaign. It benefits from looking tough. Promoting that myth will discourage close examination of the details of the deal.
As our resident mortgage maven, MBS Guy, said in an e-mail:
In reality, JPM and Dimon are getting a pretty darn good deal from the government. I suspect when the settlement is actually disclosed, it will turn out that JPM’s payout for rep breach violations/FHFA stuff are actually lower than for other banks and lower than that BofA $8.5 bilion settlement. That’s another big reason for the full court press on “poor Jamie” stories – to mask the fact that JPM is getting a bargain.
I’m fully expecting this take to be accurate. Stay tuned.