13 months ago the newly formed Residential Mortgage-Backed Securities Working Group sued JP Morgan for their contributions to the financial crisis through their mortgage activities. Yesterday the two parties reached a $13 Billion settlement which includes $9 billion in restitution and $4 billion in help for homeowners and communities impacted by high foreclosure rates.
Clearly this RMBS group was set up by the administration to blame a few highly visible targets and impose populist penalties. You can smell the politics in this statement from New York Attorney General Eric T. Schneiderman who co-chairs the Working Group:
Since my first day in office, I have insisted that there must be accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy. This historic deal … is exactly what our working group was created to do...We refused to allow systemic frauds that harmed so many New York homeowners and investors to simply be forgotten, and as a result we’ve won a major victory today in the fight to hold those who caused the financial crisis accountable.
Hmmm. But what about the government's role in the financial crisis?
For starters, the Justice Department statement of fact in the JP Morgan lawsuit references not only the sins of JP Morgan but also the two financial firms that JP Morgan acquired in the middle of the financial crisis - Bear Stearns and Washington Mutual. In fact, 80% of the losses at issue were caused by Bear Stearns. However, Bear Stearns and Washington Mutual already paid a hefty penalty for their stupidity. They are no longer in business and their shareholders took a huge hit. I know this first hand since I lost my entire investment in Washington Mutual. My mistake. I deserved that. Furthermore, JP Morgan was strongly encouraged by the Federal Reserve to acquire these two companies because the Federal Reserve did not have a lot of other good solutions to their problems. Good luck getting the next stable bank to step up to the plate the next time the government needs help.
Then there are the penalties. Only $7 billion out of the $13 billion is going to compensate the investors, who were the ones really directly hurt by this fiasco. Another $2 billion represents a fine to federal prosecutors so I'm OK with that. But $4 billion is going to go to "struggling homeowners in hard hit areas" - $2 billion in the form of reduced mortgage balances and $2 billion in the form of reduced interest rates and new mortgages to low income home buyers. But I maintain that these people were not directly hurt by the poor securitization practices. In fact many of them got to live in nicer homes than they could afford for a substantial period of time and many of them lived there for a few years for free as they waited for foreclosure to arrive on their doorsteps. And why would you require JP Morgan to make more loans to low income home buyers, which is a big piece of the types of loans that got us into trouble in the first place?
And let's not forget that JP Morgan has already paid out billions in other settlements related to the mortgage meltdown and will still be facing other prosecutions down the road. And one more thing...JP Morgan is not some identity-less monolithic monster. It's a public company with millions of shareholders who are impacted by their good and bad fortunes. I know. I'm one of them.
So, although I'm sure that Michael Moore and lots of other people will feel really good about this settlement I don't really think that anyone deserves the pat on the back that they are lining up to receive. This is just another round of the blame game.
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