JP Morgan’s Big Fraud Fine Is Itself a Big Fraud
|November 30, 2013||Posted by Staff under Financial|
JP Morgan Chase’s long-awaited $13 billion deal with the Justice Department is not a $13 billion deal. $4 billion of this figure was the conclusion of a lawsuit between JPMorgan and the Federal Housing Finance Agency. So, let’s talk about this $9 billion settlement.
Nearly half of the figure comes in the form of “mortgage relief” that the bank has four years to distribute. Any time you extend the time horizon of a penalty, you’re reducing its real value.
The bank only has to put $1.2 billion of the $4 billion into first-lien principal reductions for homeowners facing foreclosure, which is less than JPMorgan Chase’s obligation under the original foreclosure fraud settlement. Now $300 million goes toward extinguishing second liens, like a home equity line of credit. Another $300 million is earmarked for principal forbearance, where the homeowner still owes the money but gets to skip a few immediate payments. $2 billion would go toward interest-rate reductions or refinancing or even writing new mortgages for moderate-income borrowers (that’s a penalty, writing mortgages that pay the bank interest?), and the balance toward anti-blight provisions like bulldozing homes or buying out properties where the bank has delayed foreclosure.
Almost none of this represents a real penalty for the bank. It performs anti-blight procedures annually in its normal course of business. Principal forbearance has minuscule long-term cost. Second liens that typically cannot be recouped are worthless to a bank, and it’s hard to say it “costs” anything to extinguish them. The bank is even credited for writing down principal on loans owned by mortgage-backed securities investors, paying off their fine with other people’s money (the other people in this case being the very investors they defrauded!). And all the measures to help struggling homeowners actually help JPMorgan Chase in the long run, because it makes financial sense to modify loans rather than foreclose.
Meanwhile, almost all of the deal, save a $2 billion penalty to the U.S. Attorney’s Office in Sacramento to settle a civil lawsuit, is tax deductible as a business expense. Assuming a 38 percent rate for deductions (as JPMorgan does) on $7 billion in business expenses, this knocks another $2.66 billion off the real cost to JPMorgan Chase. A ballyhooed $13 billion settlement winds up being closer to $2.74 billion.
It’s impossible for the punishment to fit the crime here, in monetary terms. If you calculate the actual harm done through fraud in the housing market and the impact on the broader economy, JPMorgan and its fellow banks would owe more money than they could ever scrounge up. Jail sentences for those who authorized and directed the conduct could at least create a deterrent for the future.
The bank settled mortgage-backed securities claims with private investors just last week. The long delay in finalizing the settlement with the Justice Dept. kept the facts from being used against them in the other cases.
Ed. Notes: This bad behavior by banks will go on as long as we keep giving them so much of our money, especially our common wealth, our spending for land and resources, a torrent of spending that we should keep in our communities, where it can compensate each of us for keeping off the land of all the rest of us. Further, it is community features that generate site value — views, crime rates, etc — so it is the community that deserves to keep locational value circulating within its borders. Collecting site value from owners will spur them to keep their land at best use while paying shares of collected “rents” will empower residents to live securely, having their economy serve them rather than they serve it.