J P Morgan seeking to settle mortgage woes for far less than 20 billion......
THURSDAY, SEPTEMBER 26, 2013
The Fat Lady Has Yet to Sing for Dimon and JP Morgan
I thought I was late to write about JP Morgan’s $920 million multi-regulator settlement last week on the London Whale, but breathless news of a possible $11 billion settlement of mortgage-related liabilities has pushed the bank and its chief back under the hot lights.
Let’s go in reverse chronological order. The $11 billion settlement, if it comes together, is less of a hit than it seems. JP Morgan’s stock traded up 2.7% when the news broke. First, the $11 billion is really more like $7 billion, which is the cash component. The remaining $4 billion is various forms of borrower relief. If this settlement bears any resemblance to the mortgage settlements of 2011 and 2012, these are junk credits, with the bank being allowed to claim relief for things it would have done anyhow. If the economic value of bona fide borrower relief gets to be as much as 10% of nominal value, that would be a large by historical standards.
The reason the numbers being bandied about are large is that the total includes FHFA putback claims, which the Wall Street Journal puts at $6 billion out of the total. FHFA suits against all the banks were pencilled out as carrying a price tag of as much as $200 billion. But that estimate likely based the total on the value if the agency litigated and prevailed (which frankly was pretty likely, the GSEs have well-defined rights). The Department of Justice is leading the negotiations and the New York state is also a participant.
In addition to an apparently large bid-asked spread (the Morgan bank proposed a mere $3 billion versus the $11 billion bruited as the sought-after figure) and the fact that the bank wants a global settlement for all mortgage-related liability (the DoJ is reluctant to settle criminal liability), another potential sticking point is an admission of wrongdoing.
But in many ways, the $920 million London Whale settlement last week is a much bigger deal. It’s been remarkable to see how much confused or deliberately misleading commentary has been published about the pact. To wit: Jonathan Weil reveals he does not understand that SEC rules implement legislation. Ouch. And Matt Levine wrote such an absurd piece that I don’t need to do a takedown. If he keeps this sort of thing up, he’ll have a great future at the Onion.
I’ll probably have more to say about this in future posts, so let me stick to a few big issues:
JP Morgan is not out of the woods on the Whale matter. This settlement was for the SEC, the FSA, and the OCC. Given how Senate testimony the degree to which JP Morgan flat out lied to the OCC and the severity of the control failures, I’m surprised the dollar value wasn’t bigger. One small consolation is that the CFTC was not part of the deal, and its settlement is likely to be 50% of what JP Morgan has already agreed to pay.
And it’s important to understand how world class terrible JP Morgan’s oversight of the CIO was. The SEC order makes for juicy reading. One of the stunners is that Dimon lied to his audit committee. Some executives were loath to sign valuations that were important components of the CFO’s and Dimon’s certifications of financial statements. And we have this remarkable tidbit:
33. The CIO-VCG staff actively involved in price-testing the SCP’s 132 positions at the end of the first quarter of 2012 consisted of one person, who worked at CIO’s London office. That person was also responsible for price testing all of CIO’s other London-based portfolios.
One person responsible for price testing of a major portfolio? That’s all you need to know that JP Morgan’s controls were utter rubbish. The Globe and Mail adds:
Whale aficionados also now have more information on just how ineffective JPMorgan’s compliance staff were at monitoring their traders. JPMorgan’s senior management did not inform the relevant back-office department in London that it was reviewing the valuation of the Whale portfolio for over two weeks. Given recent rogue trading incidents at Société Générale and UBS, the low regard in which the control function at the bank was held is extraordinary.
An admission of how grossly deficient they were comes in how much the bank is spending to bring them up to snuff. From Reuters:
JPMorgan Chase & Co (JPM.N) plans to spend an additional $4 billion and commit 5,000 extra employees to fix risk and compliance issues after a slew of investigations by regulatory authorities, the Wall Street Journal reported on Thursday.JPMorgan will spend $1.5 billion on managing risk and complying with regulations and plans to add $2.5 billion to its litigation reserves in the second half of the year, the Journal reported.The bank will also increase its risk-control staff by 30 percent, the WSJ said, citing people familiar with the matter.JPMorgan said on Monday that it would add more than $1.5 billion to its legal reserves in the third quarter and 3,000 people had been added to control functions.Another 2,000 assigned to the bank’s various business lines are also working on compliance issue, a personfamiliar with the matter who would not provide the total cost told Reuters.
Now even though we agree with the Bloomberg editors, who deem the Whale settlement to be too small, why do we still think it’s hugely significant?
Dimon screwed Corporate America. Did you notice the howling about the $920 million settlement from much of the financial media? They may be upset about the precedent set by JP Morgan admitting to wrongdoing. But far more significant is something that the SEC perversely did not play up, which is that JP Morgan ‘fessed up to Sarbanes Oxley violations. And that means that the normal fig leaf of having a complaint auditor say everything was fine is no protection.
Remember, heretofore Sarbanes Oxley has been a dead letter, at least from an enforcement perspective. To my knowledge, there were only two previous times the SEC tried using it: in HealthSouth, where it lost in court (not necessarily a meaningful indicator, since Richard Scrushy had huge home court advantage with an Alabama jury [he went to considerable lengths to taint the juror pool by large donations to and regular appearances in black churches]) and against Angelo Mozilo, where the SEC lost a ruling that seemed to put it off trying to use Sarbox (discussed at length in this post).
The reason that this is a big deal is Sarbanes Oxley was designed expressly to get past the “I’m the CEO and I have no idea what happened” defense. Sarbanes Oxley requires corporate executives, which generally is at least the CEO and the CFO, to certify the adequacy of internal controls. And for a big bank, that includes risk controls. You can’t pretend to have adequate controls when, as the SEC describes, management is shocked to learn that your counterparties are demanding hundreds of millions in collateral because everyone in the market (as well as your own investment bank!) is marking positions differently than your biggest trading unit in the bank. But it isn’t just banks that have to now take Sarbanes Oxley seriously, although they are the most obvious targets. Everyone who signs Sarbox certifications is now at risk, as they were supposed to be all along.
Dimon is not out of the woods. The SEC only settled liability with the bank; it is still looking into charging individuals. The Wall Street Journal reported:
“Our counsel has had discussions with the SEC staff and the staff has informed us that, based on the evidence now known to them, they do not anticipate recommending any actions against our CEO,” a J.P. Morgan spokesman said
A compliance expert e-mailed to say that Dimon met all the conditions for a criminal prosecution under Sarbanes Oxley. So it’s the reluctance of the regulators to take on a TBTF CEO (particularly one that has no credible successor in the wings) that is keeping him safe for now.
But remember, the CFTC’s investigation and resulting order may provide additional damning information. And recall the FBI and the Southern District of New York are trying to extradite two Whale traders. One is likely to be beyond their reach, but the other may not be. If he turns useful state’s evidence, the desire among the officialdom to Do Something About Dimon could change.
I was hearing concerns voiced about Dimon over two years ago. Among other things, he’d browbeaten Ben Bernanke and Mark Carney, then the head of the Bank of Canada, within a span of week (Carney kept his cool and issued what everyone recognized was a dressing down within 24 hours). The concern was that either Dimon was becoming more erratic, or the bank was actually in trouble of some sort, and Dimon was going on the offense to divert attention from his problems. And worse, even though all TBTF are systemically dangerous, if anything JP Morgan is more so by virtue of its massive tri-party repo operation.
Now even if more damning fact emerge about Dimon, they’d have to be awfully damning for him to be the target of litigation. But I could see the threat of litigation to be used to get JP Morgan to clean up its corporate governance act. At a minimum, the bank needs to split its CEO and Chairman roles (Dimon threatened to quit over that, but that was before the Whale shoes started to drop and analyst Josh Rosner released his rap sheet against JP Morgan, cataloguing the astonishing range and costs of regulatory sanctions) and force Dimon to have a real successor lined up, not some candidates who are clearly years away from being ready to take the helm.
It’s way too early to tell how meaningful these actions against JP Morgan will prove to be. One robin does not make a spring. But they are at least an improvement over the abject regulatory dereliction of duty we’ve seen by regulators in the wake of the crisis, and if we are lucky, may represent them re-learning how to use their muscle.
http://www.zerohedge.com/news/2013-09-25/jpmorgan-settlement-reach-11-billion-ap-reports
JPMorgan Settlement To Reach $11 Billion, AP Reports
Earlier in the week, we warned the mortgage settlement that JPMorgan might face could reach $20 billion. Well, 'officials' at the DoJ according to AP have stated that:
- JPMORGAN NATIONAL SETTLEMENT MAY REACH $11B, AP SAYS
- JPMORGAN PACT MAY INCLUDE $7B CASH, $4B CONSUMER RELIEF
What is most surprising is that JPM did not arrange the $11 billion "settlement" as $12 billion in consumer relief and a $1 billion cash payment from the government.
Bear in mind that $7 billion is a huge 36% of JPM's total remaining $19.4 billion in loan loss reserves.
Via AP,
An official familiar with ongoing negotiations among federal and state officials and JPMorgan over mortgage-backed securities says a national settlement for $7 billion in cash and $4 billion in consumer relief is under discussion.The government official says the Justice Department is taking the lead, though the settlement would include states with claims against the bank. The official spoke Wednesday with The Associated Press on condition of anonymity because a settlement hasn't been reached and the person wasn't authorized to discuss it publicly.The government has continued investigating JPMorgan over mortgage-backed securities, which banks sold in the run-up to the financial crisis. The securities lost value after a bubble in the housing market burst.
and....
JPMorgan may settle with group of agencies
http://www.zerohedge.com/news/2013-09-24/jpmorgans-mortgage-settlement-may-reach-20-billion
JPMorgan's Mortgage Settlement May Reach $20 Billion
It just has not been JP Morgan's year.
The firm which in the early years after the Lehman collapse was happy basking in the shadow of Goldman and Lloyd Blankstein, as the squid took the bulk of the public fury, is now getting the royal punching bag treatment and it appears that with every passing day Jamie Dimon's bank, the largest in the US, is hit with a new lawsuit, fine, or settlement. But while the most notorious breach of fiduciary duty in the recent past was the firm's infamous London Whale prop trading blunder, which resulted in an SEC settlement had the firm actually admit guilt to securities law violations, the actual damage to JPM was a manageable slap on the wrist amounting to a largely token $950 million.
Ironically, it may be the sins from JPM's pre-crisis legacy closet that come back to haunt it most dearly, and result in a fine/settlement that would make the London Whale damages seem like lunch money (expensed to the taxpayer of course).
As the NYT reports, "The nation’s largest bank is bracing for a lawsuit from federal prosecutors in California who suspect that the bank sold shoddy mortgage securities to investors in the run-up to the financial crisis, according to people briefed on the matter. The case, expected as soon as Tuesday, could foreshadow other actions stemming from the bank’s crisis-era mortgage business. Federal prosecutors in Philadelphia, the people briefed on the matter said, are also investigating JPMorgan’s sale of mortgage securities."
But while a mortgage-related lawsuit and/or a settlement was long in the making, and was well-known to most in the industry, it is the monetary aspect of the resolution that is slowing down the outcome. Because if the NYT is correct, not even taking credit for all its fake "earnings" in the form of a complete reserve release would save JPM:
Underscoring the breadth of the scrutiny, the people said, JPMorgan and the Department of Housing and Urban Development briefly discussed the possibility of striking a wide-ranging settlement to conclude many of the looming mortgage investigations from federal authorities and state attorneys general. But the housing agency floated a price tag of about $20 billion for the settlement, the people said, effectively derailing settlement talks with JPMorgan lawyers, who were stunned by the size of the proposed penalty and expected to pay a fraction of that sum.
That's right: $20 billion! That is more than the firm has reserved for all current and future litigation, is roughly how much net Income JPM would have in a good year, and most importantly, is more than the entire amount of loan loss reserves JPM has ($19.4 billion) on the books currently. Should this buffer be exhausted then JPM will be in a truly sticky predicament: it will actually have to make real, non-imaginary profits!
Should JPM not be able to negotiate this epic settlement away, which would likely be the largest in the history of finance, then the firm's stock plunge from 2012 will be a playful treat compared to what awaits Jamie Dimon, who will almost certainly lose his job if a settlement of such magnitude is formalized.
- Reuters/Reuters - A sign outside the headquarters of JP Morgan Chase & Co in New York, September 19, 2013. REUTERS/Mike Segar
By Aruna Viswanatha, Emily Flitter and David Henry
NEW YORK (Reuters) - JPMorgan Chase & Co, facing several investigations into its mortgage practices, is seeking a global settlement with U.S. government authorities in multiple jurisdictions, a person familiar with the matter said on Tuesday.
Negotiations have resumed with the U.S. Department of Justice after federal prosecutors in Californiadelayed a plan to file a lawsuit there on Tuesday.
The global settlement would cover probes of JPMorgan's mortgage business, as well as investigations of similar operations it inherited from other banks during the financial crisis. The investigations include civil and criminal authorities from the DOJ.
The California case involved the sale of bonds backed by subprime mortgages and other risky home loans between 2005 and 2007.
The California negotiations initially broke down over the amount the bank would pay as a penalty, sources said.
Meanwhile, the Department of Housing and Urban Development took issue on Tuesday with a report in another publication that the agency was seeking a $20 billion settlement from the bank over its mortgage practices. The housing agency said that was "categorically false."
"The department takes the allegations against JPMorgan Chase seriously and has been involved in multi-party negotiations to reach a settlement. However, no one at this agency - including the secretary - ever floated a $20 billion settlement figure," HUD general counsel Helen Kanovsky said.
The planned California litigation did not involve HUD, and that agency's involvement in the talks suggest that both the bank and the government want to resolve multiple investigations in a larger settlement, according to people familiar with the matter.
Experts said the new move toward settlement talks appeared to be driven by a strong desire within the bank to move past its legal troubles as quickly as possible, but the Justice Department likely has the upper hand in the talks, given how close it came to filing the suit.
In a regulatory filing in August, JPMorgan disclosed it was under parallel civil and criminal investigations by federal authorities in California and that the authorities on the civil side told the bank in May they had preliminarily concluded it violated federal securities laws.
To observers, another legal battle is the last thing the largest U.S. bank needs as it struggles to move past conflicts with regulators and prosecutors involving several business lines.
"The way I see this, JPMorgan would like to avoid the continuing Chinese water torture of reputational damage they've been suffering," said Kathleen Wailes, senior vice president at LEVICK, a public relations and crisis-management firm in Washington.
"They would like to dispose of this in a settlement as opposed to a trial and get rid of this as quickly as they can to move on the more positive subjects," Wailes said.
On Thursday, JPMorgan agreed to pay $1 billion to settle regulatory actions related to a $6.2 billion trading loss it incurred last year in its Chief Investment Office and to allegations of wrongful billing of credit-card customers.
Last week's settlements were part of a new push by the bank to try to remake its public image into one displaying more deference toward regulators.
"The government is attacking very weak prey now," said Jonathan Macey, a corporate law professor at Yale Law School.
"I certainly don't think we can say JPMorgan is in a strong position because they've experienced such a relentless onslaught of legal and regulatory actions."
However, JPMorgan is financially strong and making record profits, despite the damage to its reputation, the expense of about $5 billion in annual legal costs, and government orders to fix its risk controls and legal compliance systems.
The company reported net income of $21.3 billion last year and analysts expect profits this year to be even higher.
JPMorgan's stock price on Tuesday was about 25 percent higher than before it disclosed in May 2012 that it was losing billions of dollars on its Chief Investment Offices' "London Whale" derivatives trade.
Chief Executive Officer Jamie Dimon said in a statement issued by the company on Thursday: "We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them."
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