Editorial: Punishing the Culprits; Feds’ Pending Deal With JPMorgan
The federal government actually has another few years to punish those responsible for the 2008 financial crisis — there’s a 10-year statue of limitations on financial-fraud cases — but sooner is definitely better than later. We’d rather see banks and other financial institutions get their just deserts while the damage they did is fresh in everyone’s mind.
With the country still not entirely recovered from the Great Recession, it’s fair to say that the tentative agreement JPMorgan Chase has reportedly reached with the U.S. Justice Department meets that standard. The settlement would resolve numerous federal and state civil actions against the bank stemming from investments it sold that were backed by bundles of subprime mortgages. When increasing interest rates pinched the borrowers and a predictably large percentage of them couldn’t meet their obligations, the investments became worthless, the housing bubble burst and the economy came tumbling down. JPMorgan is among many financial institutions that have been accused of failing to disclose — or even deliberately misleading others about — the riskiness of those investments.
JPMorgan, according to numerous published reports, has agreed to pay the federal government $13 billion to settle the cases. Attorney General Eric Holder, according to those reports, played hardball: He insisted on a large settlement figure, rejected any agreement that didn’t include an acknowledgment of wrongdoing, and refused to close the door on the possibility of filing criminal charges against the bank.
A large portion of that total — $4 billion, according to the reports — has been earmarked to provide relief to affected homeowners, much of it in the form of assistance to lower mortgage payments. How significant that will prove to be is hard to gauge, but there can be little doubt about the magnitude of the penalty. It is the largest a company has ever paid the Justice Department, and it represents more than half the profits the bank earned last year, according to The New York Times. The bank, which continued to rake in profits even after much of the financial system collapsed, has announced that the $9.2 billion it has set aside to begin covering its legal expenses will result in its first quarterly loss since Jamie Dimon became its chief executive.
Enormous as the penalty might be, the real question is whether it is large enough to effectively deter JPMorgan and other financial powerhouses from engaging in risk-taking of a magnitude that puts the nation’s economic stability in jeopardy. With questions arising about whether the new financial regulations enacted through the Dodd-Frank law are tough enough to prevent the country from being forced to bail out reckless companies in the financial sector, it is especially important that the punishment meted out for the 2008 disaster alter the risk-reward calculus.
If nothing else, the stiff terms of the pending settlement places some reassuring distance between the federal government and the financial industry. With the clout of the industry all too evident in the legislation that emerges (or doesn’t) from Congress, in the lax enforcement of regulations and even in numerous high-level appointments by a succession of presidents, it is refreshing to see federal officials come down hard on the institutions that have caused so much pain and, until recently, been spared any of it themselves.