JPM Settles For Corruption

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.


Michael S. Greve

Michael S. Greve is a professor at George Mason University School of Law. From 2000 to August, 2012, Professor Greve was the John G. Searle Scholar at the American Enterprise Institute, where he remains a visiting scholar. His most recent book is The Upside-Down Constitution (Harvard University Press, 2012).

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  1. gabe says

    “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.”

    I guess Yogi Berra was right after all: “it is deja vu all over again.” Not only a great catcher but a renowned political philosopher.

  2. Katherine says

    Heist. Something bad happened and someone must be made to pay. The two things are not necessarily connected or related, but this seems like a particularly egregious example of the form, “Make it stop.” Zero money will flow to actual people harmed by malformed mortgages, much will flow to the connected and the sun will rise tomorrow.

  3. sl493tpyuph says

    “Where will it come from? Shareholders, who had nothing to do with any of this.”

    The shareholders are the owners of the company. They are 100% responsible for the actions of the company they own.

    • DarthBloviator says

      Correct, with a minor quibble. Shareholders are *financially* responsible for the actions of the company they own.

    • Brazofuerte says

      Ask around and see if you can prevail upon an adult to read Prof. Greve’s article to you. Why, one might as well say that the people who voted “D” in return for ObamaPhones are responsible for the IRS scandal, Benghazi, Fast & Furious, faking Census reports, dithering over Syria, election fraud, the abortion called the ACA website rollout, “enforcement discretion” and Sandra Fluke’s birth control…

    • Andy Fox says

      Sorry, but I have to take issue with your premise. Shareholders are not responsible. That is the whole point of a corporation. The owners are not personally liable for the corporation’s actions. It is very rare for the corporate veil to be pierced. This exception is limited normally to small, closely held corporations, where the owner is using the corporation as an alter ego, and no corporate formalities are maintained.

  4. looking closely says

    Well, to be clear, the money will most certainly NOT come from the pockets of shareholders!

    It will come from the corporate coffers. To the extent this affects shareholders pockets at all, its going to be in how JPM stock is valued AFTER this settlement/payments compared to BEFORE.

    Since as of the moment of this posting, JPM is now trading at all time stock highs, its hard to make an argument that this settlement has hurt the shareholders TOO badly.

    Remember, JPM has a market cap of $215 Billion. $13 Billion is a lot of money, but the payments are going to be spread out over a long time. I’m not going to track the stock performance vs the progress of litigation, but usually right after this type of litigation is accounced, the stock price will drop, factoring in some sort of “worse case” scenario, then rebound as the case finalizes. Haven’t actually checked, but my guess is in this case, the settlement probably had no real effect on the stock price. . .by the time it was announced, it was probably already “priced in”.

  5. looking closely says

    >>”Shareholders are *financially* responsible for the actions of the company they own.”

    Not really. Except under highly unusual circumstances, corporations are free-standing independent legal entities. Shareholders have no specific financial obligations with respect to shares they own. IE, if JPM were forced to make a settlement in excess of its total worth or ability to borrow, the shareholders wouldn’t be able to be held liable for the difference.

    In practice, the worst thing that would happen to the shareholders is the company would go bankrupt and the value of the shares would go to zero.

    Its probably fairest to say that shareholders are stakeholders in the performance of the company.

    Negotiating an extortionate settlement with the States and/or Federal Gov’t is a REAL nice racket. . .for the gov’t and especially private lawyers therein who siphon off their own cuts. But just like parasites don’t benefit if they kill their hosts, these settlements aren’t helpful to anyone if they destroy the companies in question. Just settling one of these things doesn’t necessarily hurt the company. . .the devil is in the details. Go take a look at how RAI, MO, and the other major domestic American tobacco companies did after the 1998 MSA settlement. These companies effectively passed on the costs of said settlement as an extra-legal “tax” on the backs of cigarette consumers, and used the terms of settlement as a way to stifle outside competition.

  6. gabe says

    Good comments!
    But the real point may be this. JPM was “encouraged” (compleed, perhaps) by the government to buy the mortgage businesses in question as well as being compelled to accept stimulus money. As Prof. Greve states “No good deed goes unpunished.”

    Moreover, the whole fiasco can be traced directly back to government policies “encouraging home ownership.”

    As those responsible for implementing (forcing upon the banks) these silly policies, have not been punished, I suppose we should modify the Greve quote:
    No good deed goes unpunished; and no bad deed goes unrewarded.” That is the new definition of progressive politics.

    take care

  7. gabe says


    yes and not only that, it has certainly made it more expensive for me to buy new S/W from M-Soft. Licenses for the home can now be used only on one computer and must be renewed as opposed to the past.
    Thank god, the guvmint is looking out for us!!!!! What would we poor losers do without it?

    take care

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