JPMorgan Chase is
probably going to have to pay a record $13 billion fine because it created and sold dicey financial products that helped cause the financial crisis that sparked an economic crash in 2008. JPMorgan CEO Jamie Dimon has groused that this an unfairly large sum. But some experts beg to differ, noting that if the world were fair, Dimon's bank would have to pay a lot more.
On Saturday, JPMorgan reached a tentative deal with the Department of Justice, which has investigated the megabank for having packaged poor quality mortgages into securities that it sold to investors. (Some of the securities were peddled by Washington Mutual and the investment bank Bear Stearns, two failing firms that JPMorgan absorbed in 2008.) The $13 billion penalty, which is not yet final, would cover about $9 billion in fines paid to the federal government and $4 billion in relief for struggling homeowners. It would be the largest penalty that a single company has ever paid in settling a case with the Justice Department.
The historic deal is a sign that the Obama administration's crackdown on Wall Street is finally gaining steam. But experts note that the $13 billion fine—which seems a gargantuan amount—is not nearly enough. First, the fine is really only $9 billion, says William Black, an associate professor of economics and law at the University of Missouri-Kansas City and a former bank regulator who led investigations of the savings and loan crisis of the 1980s. The $4 billion in relief to homeowners, he explains, represents loan modifications that the bank would have made in any event to minimize losses and avoid foreclosures. (And that $9 million, he adds, is tax-deductible.) Second, Black says, the total damages JPMorgan, Washington Mutual, and Bear Stearns inflicted directly on purchasers of the shoddy mortgage-backed securities is estimated to be $100 billion. "The normal rule in terms of remedies for frauds of this scope," he says, "is that you pay for your damages that you caused." And if those damages were caused by fraud as opposed to mere negligence, Black adds, the US legal system often makes the fraudster pay punitive damages of at least twice that amount. "A normal recovery would be in the range of $200 billion," he says.