The government's attempts to hold banks accountable for their mortgage practices may finally be paying off. On Friday, JPMorgan Chase agreed to pay $5.1 billion to the regulator of Fannie Mae and Freddie Mac to resolve charges related to toxic mortgage securities sold before the financial crisis. That amount had been negotiated as part of a broader $13 billion settlement — yet to be finalized — between the bank and state and federal officials over the bank's mortgage practices.
Earlier in the week, a federal jury found Bank of America liable for mortgage fraud before the financial crisis. The jury also found a former manager specifically responsible for some of the wrongdoing. Prosecutors have asked the judge to impose a fine of $848 million on the bank.
These developments have come late in the game, more than five years after the start of the mortgage crisis from which the economy and millions of homeowners have yet to recover. And it may be too late for the government to pursue trials against other banks for similar misconduct, because of statutes of limitations.
A broad settlement with JPMorgan, however, could well be a template for other settlements in the near future. As the final pieces of the deal are put in place, it is crucial for the government to secure adequate redress for wrongdoing and clear accountability up the chain of command. (The bank manager in the Bank of America trial was small fry, relatively speaking.)
Of the $13 billion total settlement with JPMorgan — which would be the largest ever paid to the government by a single corporation — most would go to the housing regulator and to other investors who sustained losses on securities sold by JPMorgan and by two banks it bought during the financial crisis, Bear Stearns and Washington Mutual. Another $4 billion reportedly is earmarked for mortgage relief for homeowners. The only penalty would be $2 billion to $3 billion for the dubious securities sold by JPMorgan itself.
This hardly seems punitive; indeed, even with the settlement payments, JPMorgan is likely to come out way ahead, given the income and market clout that Bear Stearns and Washington Mutual have contributed to the bank since the end of 2008.
The real losers in the deal would be homeowners, because the $4 billion in relief does not appear to add to existing aid; rather, it is almost surely relief the bank would have provided anyway. JPMorgan also will be able to deduct most of the settlement from its taxes — for a tax savings of roughly $4 billion — unless the settlement forbids the write-off. (Memo to Justice Department: Forbid the write-off.)
Another problem is that the deal appears oddly short on accountability. Negotiators reportedly have not yet decided how much wrongdoing, if any, the bank will admit. If there is no admission of fault, that would imply the claims are meritless, though it is unfathomable that the bank would pay $13 billion if it had done nothing wrong.
Banks, however, are loath to admit wrongdoing in government settlements because they fear subsequent shareholder lawsuits. If the government accepts no admission, or an admission that is broad and nonspecific, it would be shielding JPMorgan — on the theory, presumably, that private lawsuits would imperil the bank and endanger the economy. But if the settlement, in effect, precludes private litigation, then $13 billion is not enough. The government has to require either a bigger settlement, which seems unlikely, or a clear and comprehensive admission of wrongdoing.
The settlement reportedly does not include a promise by the government to give up a federal criminal investigation currently under way into the bank's mortgage practices. That is as it should be, but it is worth recalling that past indictments for banks' violations have focused on lower-level bank employees or distant subsidiaries, while higher-level executives have remained immune.
The Bank of America trial, over actions taken at Countrywide Financial, the mortgage company that the bank bought in early 2008, shows what might have been possible if the government had taken action in a more timely way. Done right, the JPMorgan settlement and others patterned on it may be the last hope for some justice for the fraud and other wrongdoing that fueled the financial crisis.
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