Everything you need to know about the biggest financial settlement in history: JPMorgan's $13 billion check to the U.S. government.
WHAT WAS THE ORIGINAL WRONGDOING?
In the years before the financial meltdown of 2008, a lot of people were looking to take advantage of the strong housing market, and some of those people were not credit worthy. The banks, in an effort to capture as many customers as possible, began offering mortgages that were of questionable quality, often given to people without verifying their credit or earnings.
JPMorgan Chase & Co. (NYSE:JPM) was among a group of banks that sold the packaged securities to Fannie Mae and Freddie Mac, the now private, government-backed mortgage firms.
When the financial bubble burst, Freddie and Fannie took a huge hit, resulting in a $187.5 billion bailout of the two firms.
WHY WAS JPMORGAN AT FAULT?
JPMorgan was seen as an oasis in the housing meltdown and the only bank strong enough to absorb Bear Stearns and Washington Mutual, but now those failed banks are coming back to haunt Jamie Dimon and JPMorgan. The proposed settlement alleges that Washington Mutual and Bear Stearns, along with JPMorgan, packaged faulty loans into financial securities that were sold to investors. The loans blew up, starting a chain reaction that almost took down the global economy.
So what happens to the man that was once tipped to be the treasury secretary, a master deal maker, an unmatched banker? He has been supported by shareholders in the past, and that is likely to continue given that the stock is up 29 percent over the past year.
WHO WILL GET THE MONEY?
Nine billion dollars constitute the fines and penalties and $4 billion will go toward consumer relief, including home-loan modifications. While it’s unclear who will actually receive the money, it will eventually make its way to the treasury general fund. However, there is talk that the government will pay some of the fine because they were involved in the purchase of the two financial companies.
WHO WAS RESPONSIBLE FOR THE WRONGDOING?
JPMorgan certainly has a lot to answer for and government investigators are ensuring that those answers are forthcoming. The bank says that 80 percent of the problems stem from the acquisition of Bear Stearns and Washington Mutual.
The government-prompted purchase was an attempt to stop a larger financial meltdown, but it only managed to stop it for about six months, at which point Lehmann Brothers filed for bankruptcy and the financial world spiraled out of control. Washington Mutual was purchased under similar circumstances.
WHAT ARE THE POTENTIAL CRIMINAL CHARGES FACED BY THE BANK?
So far the settlement only protects JPMorgan from civil charges, and criminal charges can still be filed. The fact that the authorities rejected JPMorgan’s proposal that the deal rule out criminal prosecution does not necessarily mean they will face any charges at all.
Criminal charges are generally rare for banks because civil penalties are higher and the law stipulates that criminal prosecution against any large company must be measured against the wider damage that it would cause to the economy.
ARE THEIR LEGAL TROUBLES OVER?
Absolutely not. The most recent fine opens the door for criminal prosecution, lawsuits and heavy fines. Dimon has said he would love to put the troubles behind the bank but he may not have that luxury. He has been cleared of criminal wrongdoing so far but more charges are likely.
WHAT DOES THIS MEAN FOR CEO JAMIE DIMON?
It’s unlikely Jamie Dimon will lose his job. Shares in the company have remained unchanged since the deal was announced and are actually up 20 percent this year. The $13 billion settlement will come out of a fund of $23 billion to deal with legal issues and shouldn’t cause many problems for a bank that has assets worth $2.5 trillion and income of $21.3 billion.