The much-ballyhooed $13 billion settlement between the Department of Justice and J.P. Morgan looks like an EU Treaty: pages of burble, plus various annexes. DoJ press release with full text etc. here. As near as I can tell, JPM admits to having had sex in a federally sponsored whorehouse—with private parties, government parties, and parties in between (Freddie and Fannie). JPM’s partners had no idea what was happening to them; they innocently relied on JPM’s assurances that the firm was at all times wearing its due diligence condom. I express no view on the merits (except that in my book they’re all guilty and deserve what’s happened to them). Two questions, though:
What Has Been Settled? The settlement advertises itself as “full and complete,” and JPM expressed relief at finally having this behind itself. However, the settlement cannot bind non-parties—private litigants, for example; or the 46 states that aren’t parties to the settlement. As to them, the we-did-have-sex settlement invites further claims. Also, the settlement is “complete” with explicit reservations, listed in Section 11. There are thirteen of them: criminal liability; liability of individuals; tax liability; claims by NCUA, FHFA, FDIC, and the State of New York; claims related to a previous National Mortgage Settlement; any further claim by the U.S., HUD/FHA, VA, and Fannie or Freddie; claims against JPM over stuff other than residential mortgage-backed securities; administrative liabilities; obligations created by the settlement; qui tam actions in six pending cases (and no, JPM’s payments for this settlement won’t count as set-offs in those actions, to which the U.S. is a party); a pending case by the State of California, and another by New York; or anything having to do with the manipulation of Libor rates. Have we left anything or anyone out?
What sentient human being would pay $13 billion for this? Answer, the best bankers and lawyers in the nation would, because they know how the system works. I’d hate to second-guess their judgment—which is precisely what has me worried.
Where Does the Money Go? Where will it come from? Shareholders, who had nothing to do with any of this. Putting that aside, let’s start with the payments to states: $299 million to California; $19 million to Delaware; $100 million to Illinois; $34 million to Massachusetts. (Who the hell came up with these numbers, and what if anything do they correspond to?) This is simply loose cash, subject to exceedingly loose state law restrictions. Moving to the payments to the feds: there are payments to recapitalize “self-financing” agencies (FDIC, NCUA); a $4 billion payment to Freddie/Fannie that will eventually go to the Treasury; and a $2 billion payment that, miraculously, goes straight to the Treasury. Finally, there is a $4 billion program for “consumer relief,” “to remediate harms allegedly resulting from [JPM’s] unlawful conduct.” (“Allegedly” means that it didn’t happen. JPM paid its General Counsel—Stephen Cutler, a former SEC enforcement chief—and its so-called “defense” lawyers at Shearman & Sterling and Debevoise millions for that word.)
The “consumer relief” program, codified in Annex 2, reads like something out of the Federal Register, sans notice and comment. It is a full-scale regulatory program, consisting of four parts: loan forgiveness; rate reductions; lending to low and moderate income areas; and anti-blight programs. The settlement does not even pretend that any of this is related to JPM’s past or present conduct or with actual harm to consumers. Annex 2 is a slush fund for random redistribution—considered but rejected by Congress; beyond the statutory authority of any government agency; but now to be implemented by Fifth Branch of Government, J.P. Morgan, under the eagle eyes of a Sixth Branch, a “Monitor” (to be paid by JPM).
JPM must complete the program by 2017. What if it doesn’t? Why, the remaining funds will go as liquidated damages to NeighborWorks. Who they? Go to their website: it’s a public corporation run by sixties-style community organizers who can’t hack it at the actual housing and mortgage government, citigroup and JPM.
Never mind illegal, outright corruption, libertarians often say: the true scandal is all the stuff that’s legal. There is some truth to that. But it does not begin to capture our real problem: institutionalized corruption, under color of law.