Things could be a lot worse for JPMorgan Chase.
Yes, $13 billion is a lot of money. In fact, it's equal to about 60% of JPM's 2012 profit. That's painful, but $13 billion is still better than (in JPM's eyes, at least) the prosecution of one of its top executives or an ugly, public court battle.
It seemed the Department of Justice was ready to take the case against JPM in that direction until Dimon stepped up and discussed the issues with Attorney General Holder. A few weeks later, JPM is putting the biggest settlement in history behind it.
"The settlement, staggering in size and scope, serves as another chapter in a series of attempts by the bank to put their troubled past behind them," says John Paglia, finance chair at Pepperdine University Graziadio School of Business and Management.
So, yes, throwing lots and lots of money at the problem does help clear it up but there are some other big lessons to draw from the ordeal.
Lesson 1: When the President establishes a task force whose sole purpose is to make firms accountable for the financial crisis (and puts NY AG Eric Schneiderman at the helm, no less) someone is going down--or at least will pay headline-grabbing billions in penalties.
It didn't seem to matter much that JPMorgan was a steady entity during the crisis nor that it apparently helped the government by picking up Bear Stearns and Washington Mutual. In fact, some 80% of the $13 billion settlement was tied to Bear Stearns and WaMu.
The government was not willing to negotiate major points of the agreement, and foremost, it would not allow JPM to settle without acknowledging wrongdoing.
That's why the settlement came with an 11-page Statement of Fact laying out (somewhat vaguely) the bank's bad behavior. CLSA bank analyst Mike Mayo thinks the document is a dangerous one for JPM.
"JPM had to agree to the disparaging 11-page 'Statement of Fact' that [our legal expert] claims is 'unprecedented' and 'concerning' in terms of future liability exposure and is 'far' more onerous and 'damning' than in the typical bank settlement," Mayo says.
Lesson 2: Friendships don't go a long way in Washington.
Remember when Dimon used to visit the White House all the time? He paid at least 16 visits during President Obama’s first few years in office. But the last public visit Dimon made to DC was for his meeting with Holder shortly after he realized the DOJ was not playing games when it came to hammering out the details of the settlement.
So much for that cozy relationship.
Dimon's relationship with Washington isn't what it used to be and much of that deterioration is his own fault. The tempest in a teapot is the best example of hubris at JPM but there are other instances of Dimon's non-stop complaining about Dodd-Frank reform.
"Has anyone bothered to study the cumulative effect of all these things?" he asked Fed chairman Ben Bernanke in 2011. "Is this holding us back at this point?"
Banking industry consultant and analyst, Nancy Bush, has this advice for the rest of Wall Street, "Don't insult your primary regulator in public. And don't be arrogant in the face of overwhelmingly negative public."
Lesson 3: Banks are still too big to fail/jail. Shareholders will pay.
This lesson was obvious long before the JPMorgan ordeal.
Sure, the DOJ says yesterday's settlement with the bank doesn't "absolve JPMorgan or its employees from facing any possible criminal charges" but significant criminal charges are unlikely at this point.
"If the government truly believed that it had enough to bring a viable criminal case, that would have been it’s 'Big Stick'," says Anthony Sabino a professor at St. John’s University‘s Peter J. Tobin College of Business.
He adds, "Since it stuck with the civil side of the law, the government probably lacked the confidence that it could overcome the much higher standard of 'innocent until proven guilty beyond a reasonable doubt.' As always, it’s hard to bring criminal charges against a corporation."
It can be argued that the ones actually being punished are the bank's shareholders. That's a point bank analyst Dick Bove made before the final terms of the settlement were known. “If a crime was committed let’s find out who committed it in a court of law. Not behind closed doors. Otherwise, you’re making shareholders pay $11 billion for crimes they themselves didn’t commit,” he said.
Though shares of the bank rose yesterday and are steady toady, CLSA's Mayo says JPM's compliance cost could increase further under the agreement and thus lead to smaller revenue growth.
Notes Mayo, "JPM was right to settle and it puts the worst mortgage issues behind, but it had to do so at the a big price."
