Banking giant JP Morgan Chase is in the midst of finalizing a settlement with the Justice Department, the Federal Housing Finance Agency, and the New York State District Attorney regarding its involvement in the 2008 financial crisis. While the exact number remains the subject of much debate, the bank could pay out as much as $13 billion for defrauding investors regarding securities it issued years ago.
Based on its acquisition of Bear Stearns and Washington Mutual in 2008, JP Morgan is currently the subject of a massive investigation by the federal government into its mortgage lending practices. The two acquired companies were among the largest mortgage lenders in the nation, and they had reached that point largely by offering home loans to individuals with low income, bad or no credit history, or subprime borrowers. To further complicate the matter, subprime mortgages were then “packaged” into securities and sold to investors at large scales. With hands off regulation from the government, paired with a highly competitive sales culture amongst the issuers of mortgage-backed securities, the subprime industry became too big and fast-paced to control. As we all learned, the bubble was unsustainable; when the bottom dropped out, financial institutions and insurers teetered toward collapse, and the US economy spiraled downward.
If Bear Stearns or Washington Mutual had declared bankruptcy in 2008,the economy would have taken an even greater hit than it did. The federal government realized this, and asked JP Morgan Chase for help. The bank, with $2.4 trillion in assets, agreed to merge with the failing institutions. For a ridiculously low price, JP Morgan could now have access to West Coast markets almost immediately. It was an attractive deal that transferred a lot of wealth to JP Morgan. Through government-brokered deals, the big bank absorbed the two smaller banks, the subprime mortgages stopped being issued, and the US economy began its slow crawl towards recovery.
So why is JP Morgan in trouble today? Though leaders of the bank did not personally issue bad mortgages through Bear Stearns and Washington Mutual, they certainly knew about the toxic assets backed by the mortgages. In fact, CEO Jamie Dimon was quoted telling investors on a conference call in 2008 that “Any liability related to the assets themselves will come with us.” The case brought forth by the Federal Housing Finance Agency asserts that JP Morgan failed to warn investors at government-controlled mortgage finance companies Fannie Mae and Freddie Mac that the securities it sold were as risky as they were.
The New York Attorney General also filed a suit against JP Morgan, claiming that Bear Stearns provided the same type of misinformation from 2005 to 2007, in violation of contracts held with investors. Dimon and associates believe they should not be held responsible for purchasing a company (especially at the request of the government), while the Justice Department asserts that the bank should be responsible for losses incurred by shareholders as a result of the blatantly misrepresented toxic assets. No official settlement has been reached yet, as JP Morgan is still dragging their feet against a criminal case. Projections of the settlement total around $13 billion, while legal tax deductions could render the grand total closer to $9 billion. While this appears to be a huge sum of cash, it’s hardly a detriment to JPM’s bottom line. And, Green America and allies are encouraging Attorney General Holder to include language in the settlement agreement prohibiting JP Morgan from deducting the settlement from its taxes. The settlement won’t even deplete the firm’s legal expense fund, valued at $23 billion. So far, Attorney General Eric Holder is standing his ground against the banking giant, refusing to promise an exemption from criminal liability, though actual indictments of JPM higher-ups involved in the crisis seem unlikely. It is the Attorney General’s refusal to drop any potential criminal charges against JP Morgan that has held the settlement up so far.
If the preceding story sounds like a confusing mash of events involving millions of people, billions of dollars, and a huge lack of regulatory foresight, it’s because it is. Designating responsibility for the phenomena observed throughout the subprime mortgage saga remains difficult for prosecutors, and conspicuous by their absence are any substantial efforts to pursue criminal proceedings by government officials. Senator Elizabeth Warren of Massachusetts wrote a letter to the heads of three financial regulatory agencies, urging for greater accountability “for those who engaged in illegal activity” during the 2008 crisis. In the absence of serious criminal liabilities, JP Morgan still stands to profit from its acquisition of the two failing institutions in 2008 with minimal expense to its own. It seems an awful lot like the mega-bank is paying for its immunity from the laws designed to prevent the misconduct and fraud observed in 2008.
So what can regular Americans do to promote better banking for our communities and nation? The answer is simple; Break Up With Your Mega-Bank. By moving your money out of large banks and into smaller, community-based banks and credit unions, you can see the benefits of responsible saving and investing in your own town. Community investment helps create jobs, housing for those in need, and social services where mega-banks won’t help. You will support local businesses, and remove support for big polluting industries such as fossil fuels (JP Morgan is among the leading financers of coal power since 2005). You will offer disaster relief for communities in need, avoid outlandish hidden charges and fees on your accounts, and develop a personal relationship with your bankers. Moving your money off of Wall St and back into your own community is a great first step in mitigating the economic harm caused by the antics of large conventional banks. If you have a credit card with JP Morgan (e.g., a Chase Visa card) or a credit card with another megabank, such as Citi or Bank of America, you can get a card from a community bank or credit union instead.
The next step would be to put pressure on your elected officials to pass regulations that serve as effective deterrents of misconduct for the banks. While the Dodd-Frank Act was a step in the right direction, it is too weak to counter the inconceivable sums of money individuals stand to gain by breaking the rules. The mega-banks have grown even larger, and our economy is still at risk. As we watch to see the exact sum JP Morgan Chase will hand over to the federal government, take back control of your own investments and make it very clear that the harmful practices of mega-banks are unacceptable.
This blog post was written by Sam Catherman, Green America’s Climate Program intern.