JPMorgan Chase's tentative $13 billion settlement with the federal government over mortgage securities practices that led to the 2008 financial crisis has been making headlines around the world since it was first announced over the weekend, following a Friday night call between CEO Jamie Dimon and U.S. Attorney General Eric Holder. The record penalty, representing almost half of the bank's 2012 operating income, has generated hyperbolic outrage from writers at conservative news outlets, who described it as a "shakedown" and a "robbery," presumably while shaking their gold-tipped canes at the sky.
Those writers should be pleased as punch to learn that JPMorgan Chase, the largest bank in the United States, is likely to write the majority of that penalty off as a tax break. That's right. A considerable amount of the $13 billion — a huge sum intended to send a strong message about the repercussions of fraud and malfeasance — will be written off. Something ventured, nothing gained.
The settlement is currently set to be divided into two parts. JPMorgan Chase will pay the smaller portion, $4 billion, to the Federal Housing Finance Agency, the successor agency that oversees Fannie Mae and Freddie Mac. Those funds may go beyond merely benefiting investors, as some are likely to go toward home-loan modification.
In contrast, the larger portion of the settlement — the $9 billion fine destined for the U.S. Department of Justice and New York State Attorney General's office — may be reclassified as "business expenses," allowing the bank to take the payment as a tax deduction. In essence, JPMorgan Chase would be writing a charitable donation to the government, and then deducting that donation from its taxes.
Your Justice Department at work.
As such, the historic settlement points toward the fact that fines are an insufficient means of regulation. Rather than charging a bank an outsize fine, and then effectively paying it back to them, we should be pursuing criminal penalties against the individuals who perpetrated fraud in the first place.
Actively pursuing criminal charges seems like something that should please both those of us who support the penalization of the financial institutions that brought the global economy to its knees, as well as the people who feel that JPMorgan Chase is being persecuted after taking on two of the failed companies that were at the heart of the crisis. (In 2008, JPMorgan Chase bought Washington Mutual, a flagrant perpetrator of mortgage fraud, and Bear Stearns, which failed after over-investing in risky mortgage-backed securities, at a considerable discount, in a deal that both paid off for the bank and pleased the government by calming markets.)
Charging individual bankers with the crimes they've perpetrated — and doing so in a timely fashion — will allow us to directly target the individuals who mislead investors and misrepresent loans, rather than the companies that have absorbed (and profited from) failed institutions, like JPMorgan Chase. It will also encourage caution in an industry that has, so far, rewarded the executives behind the subprime mortgage crisis.
Fortunately, the $13 billion settlement leaves open the door for future criminal charges. After all, what we need isn't a shakedown or robbery. What we need is justice.