It's unlikely that when J.P. Morgan Chase & Co. (NYSE:JPM) agreed to buy Washington Mutual for $1.9 billion five years ago it could imagine it would find itself paying a $13 billion settlement to end several investigations and lawsuits stemming from dodgy mortgage bonds that were issued before they took control.
Late on Monday night and a little over five years later the Jamie Dimon-led bank agreed to just such a deal.
While few will shed a tear at the fate of America’s biggest bank by assets for paying this record breaking fine, the deal does suggest a a dangerous precedent for government-brokered deals going bad.
According to a Wall Street Journal report the deal was structured by U.S. Attorney General Eric Holder to avoid a scenario where a part of the government issued penalty to JPMorgan would be extracted from another government agency. Holder feared such a scenario was a real possibility given the government's hands on role when they seized Washington Mutual in Sept. 2008 before handing it over to J.P. Morgan.
In addition, J. P. Morgan also agreed not to pursue the the U.S. Federal Deposit Insurance Corp. (FDIC) for any part of the $13 billion, seemingly bringing an end to any lingering possibility that the government would take any blame for its involvement.
However, what kind of precedent does this set? It’s widely known that JPMorgan and other banks in strong positions were pressured by the government to step up and take on the troubled banks, many of which were either in bankruptcy or about to enter bankruptcy. At the time this was deemed essential for the American economy and in some ways could be seen as a public service. JPMorgan was certainly viewed that way after they acquired Bear Stearns. However for all the plaudits the bank received it now finds itself as lead character in a scenario where federal authorities can force commercial banks to make acquisitions while at the same time denying them protection from unseen liabilities later down the road.
There’s no doubting JPMorgan have benefitted hugely from that and the Bear Stearns deal, making them one of America’s most important banks that had until recently recorded nearly a decade of straight gains before making a loss in the last quarter, ironically from the legal implications of the very deals that made them such a tour de force.
“The real question to ask is: What, if anything, were the banks forced to buy during the financial crisis that they didn't want?” mused Adam Sarhan of Sarhan Capital. “Even if they were forced to buy something they didn't want, the price was so low that it was accretive to their bottom line at the time.”
In the case of Washington Mutual, JPMorgan had tried to buy the bank in April 2008 for $8 per share, clearly proving that it was something they wanted. But the bank rebuffed J.P. Morgan's advances and settled instead for a $7 billion private capital injection from investment company TPG.
By September 2008 the bank was back in trouble because of a run that sucked $16 billion out in just nine days, and with no willing buyers the government intervened and seized the bank on the Sept. 25, 2008 before selling it all to JPMorgan just one day later. That series of events cost Washington Mutual shareholders $26 million. Had the bank taken J.P. Morgan’s offer in April of that year they would have walked away with at least something.
In the end JPMorgan acquired 2,239 branches, $307 billion in assets and $188 billion in deposits for a price of $1.9 billion plus debt assumption and write downs of about $30 billion in bad loans. It all points to what can only be described as a good deal and a fair amount cheaper than what they were offering in April.
It appears that for all the government’s pressure on J.P. Morgan, there was an equal amount of desire from the New York-based bank to acquire Washington Mutual. So shouldn’t it stand to reason that if they both shared a desire to make the deal happen in Sept. 2008 – the government ensuring that they were seen by the public to be securing the economy and J. P. Morgan just trying to make a good business deal – shouldn’t they now be sharing in the failures of that past?
It’s a difficult question to answer, however, if a similar financial apocalypse should unfold in the future, there now appears to be little reason for these private banks to step up as the banking super hero when they will face public outrage and the possibility of huge fines many years down the road.
Born in the traditional manner in 1984 with slightly more hair than he has now, Christopher was raised in Edinburgh, Scotland. After four wobbly years in the British Royal...