JPMorgan Fined 0.9% of Profits for Helping to Destroy Global Economy
What's the price of dynamiting the global economy? About $154 million. That's what JPMorgan Chase (JPM), a company that last year made more than $17 billion in profits, agreed to pay to settle SEC charges that it gulled investors into buying mortgage securities designed expressly to lose value.
Not that JPMorgan admits under the decree that it did anything wrong. It's just handing over the dough and agreeing to tweak its marketing practices. The SEC administered a similarly feeble punishment last year to Goldman Sachs (GS), which like its competitor had gotten busted for colluding with a hedge fund to cook up a synthetic collateralized debt obligation structured to profit on the housing bust. The hedge fund that shorted the securities made a fortune, while investors who had been suckered into taking the "long" end of the deal lost big.
As in the Goldman transaction, securities regulators determined that JPMorgan failed to disclose to investors in a CDO the bank marketed in 2007 that hedge fund Magnetar Capital was involved in picking the underlying securities. Keep in mind that the mortgage sector was already swooning at the time. JPMorgan knew it had taken a huge financial hit on the Magnetar deal, dubbed "Squared," even as it peddled the CDO. As one bank employee bluntly -- and accurately -- described the transaction at the time in an internal email:
We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.Everybody in the pool
Of course, JPMorgan wasn't alone. At least nine other banks arranged similar CDOs with Magnetar, hawking securities that lost almost all of their value when the housing market collapsed. The cost to investors -- $40 billion. Recounts ProPublica:
Merrill Lynch, Citigroup and UBS all did multiple deals with Magnetar. JPMorgan Chase, often lauded for having avoided the worst of the CDO craze, actually ended up doing one of the riskiest deals with Magnetar, in May 2007, nearly a year after housing prices started to decline. According to marketing material and prospectuses, the banks didn't disclose to CDO investors the role Magnetar played.Put another way, such CDO transactions were at the heart of the financial crisis. Lenders pumped out billions of dollars in shoddy loans because institutions like JPMorgan needed the assets to package into CDOs. When "everything completely apart fell apart," so did the financial system. Banks buckled, requiring taxpayers to rescue them. The housing bubble that big banks had alternately helped inflate and deflate exploded all over the global economy.
And the current economic mayhem owes in no small part to the cupidity and recklessness of bankers like JPMorgan CEO Jamie Dimon, last seen chastising Federal Reserve chief Ben Bernanke for presuming to regulate the banking industry.
License to steal
Given the scale of the damage, even the WSJ is forced to concede that the $133 million fine JPMorgan is paying under the SEC settlement amounts is a "pittance." To put it in perspective, in the first quarter the company had earnings of $5.5 billion, and it of course earned billions more selling mortgage-backed securities in the run-up to the housing crash. Dimon himself got a $21 million kiss for the bank's stellar 2010 performance.
In short, the JPMorgan settlement is less a slap on the wrist than a license to steal. Its deterrence value is nil. Whatever the SEC's sober rhetoric about safeguarding investors, the message to Wall Street could not be more clear: You have nothing to fear from us.
Related:
- Better Than Bernie: How Wall Street Used CDOs to Perpetrate a Massive Ponzi Scheme
- Six Wall Street Excuses for Shadowy CDO Sales That Won't Survive Criminal Probes
- Why Wall Street Mouthpiece Jamie Dimon Is Hectoring Ben Bernanke
- The Goldman Sachs Settlement: Is This Justice?
- Win-Win Goldman Sachs, SEC Can Declare Victory in Abacus Case