- Yves Smithfinancial analyst who founded the popular finance blog Naked Capitalism. She is the author of the book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.
In part two of our interview with financial analyst and writer Yves Smith, we look at who wins and losses with the JPMorgan Chase settlement. While the New York Post accused the Obama administration of “robbing” JPMorgan, Smith breaks down how much the nation’s largest bank will actually have to pay.
Click to watch Part 1 of the Interview.
AMY GOODMAN: This is Democracy Now!, democracynow.org, The War and Peace Report. I’m Amy Goodman, as we turn to part two right now of what’s being touted as the biggest banking settlement in U.S. history. JPMorgan is set to pay a record $13 billion fine to settle investigations into its mortgage-backed securities. Five years ago, the bank’s risky behavior helped trigger the financial meltdown, including manipulating mortgages and sending millions of Americans into bankruptcy or foreclosure. JPMorgan said in a statement that its latest settlement is an “important step.” However, many in the media have portrayed the deal as unfair to the bank.
We’re going to turn right now to Yves Smith. She is a well-known financial analyst, and she is the founder of Naked Capitalism, the blog. She’s also author of ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.
If you could talk about—how did JPMorgan Chase violate the law?
YVES SMITH: The violated the law part, we’re not—we’re not completely clear on JPMorgan proper. It’s important to understand there are three legal entities involved. One is Bear Stearns, which they acquired during the crisis. One is Washington Mutual, which they acquired during the crisis. Jamie [Dimon] was delighted to buy those both at the time. And we may get into that detail. These are still financially extremely attractive deals to him. So the idea that Dimon was in any way, shape or form a victim in doing these acquisitions is really overstated.
But the key part of this deal is that this is about liability to investors. So, the government—the government is representing, in this case, a whole bunch of states that have claims against JPMorgan and the different entities, as well as the FHFA, which—sorry, Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, which entered into its own deal. But basically, the bank sold—these different banking entities sold bonds to investors that they said would be of a certain quality, and they were way short of that. And then, it was because they were, you know, lousy borrowers. They basically would say that it had a higher loan-to-value ratio; that the fellow had income, and he didn’t; that it was a primary resident, and it wasn’t—those sort of misrepresentations.
AMY GOODMAN: Is this evidence that the Obama administration is getting tough on Wall Street?
YVES SMITH: I don’t really buy that theory, because the thing that brought Jamie Dimon to the table was actually a criminal investigation which was initiated in 2007 under the Bush administration. It takes a long time to develop these prosecutions of these complex criminal frauds. So that’s why it’s been such a long lead time. And this settlement has been under negotiation for some time. There have been various investors, private investors, as well as the government, that has been pursuing these investor claims. So this has been sort of cycling through on all kinds of fronts. These suits—you know, for example, different other banks, Bank of America and, I believe, HSBC has settled their investor claims with the government. So those claims—they’re just cycling through those kind of settlements right now.
AMY GOODMAN: Yves Smith, can you talk about the pain that was caused by this? It’s always talked about in these sort of very un-understandable financial terms, macro terms, so it’s hard to really understand, though millions of people felt what JPMorgan did.
YVES SMITH: Well, there—again, this part of the settlement actually doesn’t get to the pain. That was a settlement we had last year. The settlement last year was the part—there was a huge federal-state settlement last year that was supposed to be about the homeowners. But in this case, this—these settlements are all about the investors. And so, you know, to your point, what JPMorgan is going to pay in this settlement is larger than what it paid in the settlement last year to homeowners. I mean, that just intuitively seems extremely unjust, you know, the fact that investors are basically going to get a bigger dollar compensation out of all these banking entities than homeowners got last year. I mean, that’s crazy by anybody’s standards.
AMY GOODMAN: You said that—you started to talk about how this money will be paid.
YVES SMITH: Mm-hmm.
AMY GOODMAN: Can you continue that?
YVES SMITH: Yeah, it’s very complicated, because this is being presented as one settlement. That’s part of how the numbers got so big. And, in fact, it’s a whole bunch of settlements that have been piled together. That’s why the numbers are so large. So, the biggest piece of this is from the Federal Housing Finance Agency. That’s the regulator of Fannie Mae and Freddie Mac. They bought a lot of subprime bonds and some subprime loans. And that’s the issue I mentioned earlier, where they were promised steak, and they got hamburger that was significantly green. So, that’s a—what they call in the law a contract claim. They were promised X, they got Y. It’s no different than if you bought a car and discovered it was a clunker and went back to the manufacturer and said, “Hey, you know, either fix this car or give me a new one.” The concept is exactly the same as that of these suits. So it’s all—these are all contract claims, except—except for one piece, which is a fine that comes at—which is a—there’s apparently a civil fine that’s about $3 billion. That’s the one piece that’s different. The rest of the deal is all about that kind of liability, the getting-hamburger-when-you-were-promised-steak issue.
AMY GOODMAN: CNN host Erin Burnett argued last week on her program, Out Front, that JPMorgan is being forced to pay for things that it didn’t do. Burnett said, quote, “Just because [JPMorgan] can afford it doesn’t make it right. Going after companies, of course, should be based on wrongdoing, not on who has the money. And the truth in the case of JPMorgan’s $13 billion fine is that many of the problem mortgages that they’re paying for now stem from two acquisitions the bank made during the depth of the financial crisis.” Burnett added, quote, “Five years ago, JPMorgan bought Bear Stearns and Washington Mutual. These were hastily arranged deals brokered by Uncle Sam. In fact, many would say the fair word to use is 'forced by Uncle Sam.'” Yves Smith?
YVES SMITH: That is one of the most ludicrous things I have ever heard. One thing investors say is “When the government is selling, you want to be on the other side of that deal.” And Jamie Dimon is one of the most sophisticated and experienced acquirers of financial institutions in the world. He’s literally done over a thousand deals. In fact, let’s go to—let’s go to the numbers on Washington Mutual. When they bought that company, it had—I hate to go through numbers, but we have to go through numbers to understand why this is so ludicrous—they had $40 billion in equity. JPMorgan wrote that reserve for $36 billion in losses. He expected $36 billion in losses. This is just chickens coming home to roost, that were anticipated at the time they did the deal. And even with writing down the bank equity at $36 billion, he booked a $2 billion profit at the time he bought that bank. Last quarter, they reversed another $750 million out of those reserves, meaning the deal has done even better than they expected. And on top of that, Washington Mutual was predicted at the time he bought it to earn $2.5 billion a year. He has made out wonderfully on Washington Mutual. Crying that this was a bad deal is ludicrous.
AMY GOODMAN: I wanted to turn to the media on the settlement, to ask you about the media’s coverage of the Justice Department settlement with JPMorgan. One of the examples is a story in the Financial Times that ran with the headline, “Regulation: The Paper Tiger Roars.” “Barack Obama’s task force has mauled JPMorgan and is on the hunt for other prey.” This is The Daily Show’s Jon Stewart looking at similar reports.
JON STEWART: You know who must be thrilled to hear this news? Financial analysts and business reporters who, after years of covering corporate misdeeds, are finally seeing justice served.
LARRY KUDLOW: What is up with this incredible $13 billion shakedown of JPMorgan? … This is an arbitrary and political hosing!
ANDREW NAPOLITANO: I think it’s a sophisticated shakedown.
JIM CRAMER: The Justice Department feels like it needs some scalps.
CHARLIE GASPARINO: The Obama administration is at war with American business.
MARIA BARTIROMO: Is this a witch hunt?
JIM CRAMER: This was a jihad against JPMorgan.
JON STEWART: It’s a shakedown, witch hunt, scalping jihad! So, wait, what I saw is a mutually negotiated compensatory agreement for outstanding liabilities related to some shady business dealings, you see as a shakedown, witch-down, scalping jihad! I say tomato, and you say it’s like if the Holocaust had sex with slavery while the last 10 minutes of Human Centipede watched. But I’ll bite, I’ll bite. What is the great injustice—what is the great injustice being done to JPMorgan Chase here?
MELISSA FRANCIS: Eighty percent of the mortgage-backed securities that they are being punished for were acquired when they got Bear Stearns and WaMu.
JIM CRAMER: To some degree, it seems wrong that—that JPMorgan has to pay for what happened at Bear.
ANDREW NAPOLITANO: What jury is going to hold JPMorgan Chase liable for the documents that Bear Stearns sold to people, when nobody currently running JPMorgan Chase had anything to do with the decisions that were made then?
JON STEWART: Oh, so you’re saying, why is JPMorgan responsible for the liabilities of a company that they bought? Well, I guess, because they bought the company.
But if this is a new way you guys want to run [bleep] now, all right, how about this? I owe JPMorgan Chase $500,000 on my mortgage. But I decided, you know what? [Bleep] this place! I’m just going to sell it for $50,000 and walk away with the money. And under this new system, the guy who buys it doesn’t owe you guys [bleep]! Problems you caused don’t disappear because someone buys you; they’re included in the price. You know who knew that? Jamie Dimon of JPMorgan Chase. In 2008, he was asked about legal liability from buying Washington Mutual. He told investors, quote, “Any liability related to the assets … will come with us.” He even braced his company for it by setting aside a $28 billion rainy day settlement fund. And guess what? It’s raining, mother[bleep]!
So it looks to me like this government settlement—this government settlement is $15 billion less than what Dimon thought it might be. I mean, the only way this settlement could get any sweeter is if it was tax-deductible.
CNBC ANALYST: The final tab could be down to around $9 billion.
STEVE LIESMAN: That’s because the majority of the deal is expected to be tax-deductible.
AMY GOODMAN: That was Jon Stewart on The Daily Show. Yves Smith of Naked Capitalism?
YVES SMITH: Yeah, no, the idea that this settlement is that large or that punitive is really overstated. Both these institutions have made—were strategically very valuable to Chase. They have made the bank a lot of money. They reserved for these losses. And they’re going to get—they may get money back from the FDIC for a portion of this. This is something that they’re wrangling with the government right now. And they’re going to get a significant tax deduction. So this—the victim meme is astonishing to me.
AMY GOODMAN: How does Jamie Dimon survive this? I mean, no, he doesn’t get criminally indicted. How does he remain as the head of JPMorgan Chase?
YVES SMITH: He doesn’t have a successor lined up, and he’s got a cooperative board. He’s managed to create the myth that he’s indispensable. So, if his board isn’t willing to do anything, then he basically stays in place. That’s the way it works in corporate America. I mean, it’s unfortunate.
AMY GOODMAN: You talked about the London Whale. Can you elaborate on how it relates to this largest bank settlement in history?
YVES SMITH: It doesn’t relate directly, but it points to a big pattern. The issue with the London Whale was that there was a unit in the bank where basically, in general—called the chief investment office, where JPMorgan was taking advantage of accounting rules. You’re basically supposed to use that kind of a kitty to help the bank’s treasury. The bank has—all these banks have huge amounts of money flowing in and out that they have to invest on a short-term basis. And so, they’re given very permissive accounting treatment for the money they keep in those units. He was basically running a prop trading desk in that bank, when the other banks—
AMY GOODMAN: What does that mean?
YVES SMITH: Proprietary trading means when they’re taking significant speculative risks. Sorry, that’s a—so, and when you compare the risks they were taking in that unit compared to the risks that other banks were taking, it was way out of line.
Now, on top of that, it turns out that they had—they, in particular, took a derivatives bet, which initially one of the traders—was going bad, and when the traders wanted to close out the position, they decided the losses were going to be so big that maybe they could somehow—you know, traders tend to do that: When they get in a panic, they try schemes to earn, to make more money, and they usually make things worse. In this case, they made things worse. The losses ballooned even bigger.
But the really bad part about this wasn’t just the losses; it was JPMorgan’s—more serious was JPMorgan’s conduct while this was going on. They first got up in the press and basically said nothing was happening. They greatly understated the amount of possible losses. They—for a two-week period, the main regulator of this particular entity, the Office of Comptroller of the Currency, asked for reports, and they basically made up “dog ate my homework” excuses, that somehow, “Oh, we were having computer problems, and we couldn’t get the information to them.” I mean, the way they treated the regulator was really outside the pale. And frankly, Dimon made very serious misrepresentations to investors during this period.
Now, if that isn’t bad enough, in—under the Sarbanes-Oxley, which was a series of laws passed after Enron, that was supposed to eliminate the “I’m the CEO, and I know nothing” excuse. Sarbanes-Oxley specifically provides that at least the chief executive officer, which is Jamie Dimon, and the chief financial officer certify the financial reports for their accuracy, and they’re also required to certify the adequacy of internal controls, which would include risk management. One of the things, as there were investigations and more and more was unearthed about this, is that the risk controls they had for this unit were grossly deficient. I mean, Wall Street professionals, when they heard about some of the things that were going on, were appalled. And Sarbanes-Oxley provides not just for criminal liability—or, sorry, civil. It provides for criminal. The language is almost identical. You could literally take a—you could start out with a civil case, and once you did discovery, if you thought the violations were serious enough, you could flip the same case to criminal. And I don’t understand why there hasn’t been—they haven’t gone this route with Dimon. I mean, it’s clearly that he’s in a protected class.
AMY GOODMAN: So, in 2012—this was just after London Whale was revealed—JPMorgan Chase CEO Jamie Dimon testifies before the Senate for the first time since his bank lost up to $3 billion in this risky speculative bet. Dimon apologizes for the loss but fails to explain how the money was actually lost. He also continued to voice his opposition to new banking regulations. This is one of the few tense exchanges from the hearing, with Oregon Democrat Senator Jeff Merkley questioning Jamie Dimon.
SEN. JEFF MERKLEY: In 2008, 2009, your company benefited from half-a-trillion dollars in low-cost federal loans, $25 billion in TARP loans, of TARP funds, untold billions indirectly through the bailout of AIG that helped address your massive exposure in repurchase agreements and derivatives. With all of that in mind, wouldn’t JPMorgan have gone down without the massive federal intervention, both directly and indirectly, in 2008 or 2009?
JAMIE DIMON: I think you were misinformed. And I think that misinformation is leading to a lot of the problems we’re having today. JPMorgan took TARP because we were asked to by the secretary of treasury of the United States of America, with the FDIC in the room, head of the New York Fed, Tim Geithner, chairman of the Federal Reserve, Ben Bernanke. We did not, at that point, need TARP. We were asked to, because we were told—I think correctly so—that if the nine banks there—and some may have needed it—take this TARP, we can get it to the—all these other banks and stop the system from going down. We did not—
SEN. JEFF MERKLEY: I’m going to cut you—
JAMIE DIMON: We did not borrow from the Federal Reserve, except when they asked us to. They said, “Please use these facilities, because it makes it easier for other” —
SEN. JEFF MERKLEY: We would all like to be asking—
JAMIE DIMON: And we were not bailed out by AIG, OK? If AIG itself would have—we would have had a direct loss of maybe a billion or $2 billion if AIG went down, and we would have been OK.
SEN. JEFF MERKLEY: Then you have a difference of opinion with many analysts of the situation who felt the AIG bailout did benefit you enormously. And I’m not going to carry that argument with you now.
JAMIE DIMON: Well, but they’re factually—
SEN. JEFF MERKLEY: Sir—
JAMIE DIMON: They’re factually wrong.
SEN. JEFF MERKLEY: Sir, this is not your hearing. I’m asking you to respond to questions. And I also only have five minutes.
AMY GOODMAN: That was Oregon Democrat Senator Jeff Merkley questioning JPMorgan Chase CEO Jamie Dimon. Yves Smith of Naked Capitalism, if you could comment on what he said? But I have to say, this was not characteristic of the hearing. He is really—he was—you know, the senators there were on bended knee. They’re asking him his reflections, his advice. Many of them have gotten over the years millions of dollars—their campaigns—from JPMorgan Chase, their relationship with Jamie Dimon.
YVES SMITH: Well, the other thing that was striking about that hearing, aside from a few exchanges like that, was that Dimon clearly dialed in his testimony. I have never seen a CEO show up for a hearing who was so clearly not prepared. Normally they’re very scripted. He was just—his attitude could not have been more dismissive.
In terms of they didn’t need a bailout, that’s baloney. They had actually gotten a massive bailout before the AIG bailout, which they never acknowledge. Remember when Lehman went under, one of the things that happened in the week—it was basically about a week after Lehman failed was that there started to be runs on money market funds, and they had to guarantee up to $250,000 all the funds and money in money market funds. Had that not happened, JPMorgan would have been in terribly serious trouble, because the money from money market—this is, again, very technical, but the money in money market funds finances a sort of short-term loan that banks make among themselves called “repo.” It’s agreement to—it’s agreement to sell secure—sales of securities with agreement to repurchase—that’s a technical term. But JPMorgan is one of two banks that are the hubs in this repo system. So instead of banks doing repo with each other, they go through JPMorgan. And so, the bailout of the repo system, through this money market guarantee, was directly a bailout of JPMorgan. They got one of the biggest bailouts before any of the other ones happened. And similarly, a lot of people have said, to the point that Jeff Merkley tried raising about AIG, that if AIG had gone under, Goldman would have gone under, Morgan Stanley would have gone under. There’s no question JPMorgan wouldn’t have been engulfed. I mean, the fact—the worst is Dimon seems to believe his own PR. That’s the really scary part of watching him.
AMY GOODMAN: Yves Smith, a jury last week found Bank of America’s Countrywide—the unit of Countrywide liable for defrauding Fannie Mae and Freddie Mac with loans it should have known were substandard, the penalty yet to be determined. The government has requested a maximum of something like $850 million.
YVES SMITH: Well, it’s good to see a fraud prosecution, finally. But this is sort of illustrative of the whole sort of “too little, too late.” Only one executive was prosecuted. It was a fairly mid-level woman. The jury apparently sent a note to Judge Rakoff saying, “How come there are no other executives here? Why is she the only one we’re being asked to find guilty?”
AMY GOODMAN: What was it?
YVES SMITH: Apparently they thought that it wasn’t possible that only one executive could be responsible for the conduct.
AMY GOODMAN: Right, but why—what was the answer to their question?
YVES SMITH: I guess he basically said, “Sorry, you know, you’re not here to ask those questions. You’re only here to rule on what the prosecutors put before you.”
AMY GOODMAN: And what is the larger answer to that question?
YVES SMITH: And the larger question is it’s almost impossible that this wasn’t approved and vetted at higher levels. I mean, that’s been the tendency, to the extent that anybody—if there have been any prosecutions, it’s either been small institutions or executives that could be thrown under the bus.
AMY GOODMAN: And what about the fact that Jamie Dimon can pick up the phone last week when his bank is being criminally investigated and, you know, call the attorney general, Eric Holder?
YVES SMITH: A lot of lawyers and law professors are outraged. I mean, that’s really unheard of. And it, again, speaks to sort of the impropriety and the significant financial influence that JPMorgan has in the capital. They’ve been one of the biggest donors, you know, both to the Democrat—basically to both parties. And Dimon even said at one point during the crisis that he had a sixth line of business, and that was dealing with Washington, D.C.
AMY GOODMAN: Well, I want to thank you very much, Yves Smith, for joining us, financial analyst who founded the popular finance blog, Naked Capitalism, author of the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. This is Democracy Now!, democracynow.org, The War and Peace Report. I’m Amy Goodman.