The settlement between JPMorgan Chase and the Justice Department has been reported at $13 billion, for charges that Chase sold toxic mortgage-backed securities that fueled the financial crisis of 2008.
The reported $13 billion amount is a misrepresentation of the actual figure by the Justice Department and has “nothing to do with mortgage-backed securities,” said former financial regulator Bill Black.
“That's only one of what are reportedly nine different areas of fraud by JPMorgan that are the subject of this settlement. And that means that the Justice Department is giving up the ability to prosecute, apparently, in eight of these nine areas,” said Black.
Black also says the bank will be able to reduce the fine by approximately $7 billion through payment reductions and tax deduction.
“Roughly it's a $6 billion deal,” said Black. “That still, of course, is a large number, but compared to how much wealth was extracted by the senior officers and directors, it's actually not that big a deal, and compared to the losses they caused to the world through these frauds that drove the financial crisis, it's actually a pittance.”
JPMorgan can still face criminal charges despite the deal with the Justice Department.
Transcript:
JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I'm Jessica Desvarieux in Baltimore.
JPMorgan Chase will pay a $13 billion settlement to the Justice Department over charges that it sold toxic mortgage-backed securities that fueled the financial crisis of 2008. This $13 billion amount is the largest settlement of its kind, and it represents more than half of the firm's $21 billion in profits last year. Being the country's largest bank, JPMorgan can still face criminal charges despite the deal.
Now joining us is Bill Black. He's a former financial regulator and author of The Best Way to Rob a Bank Is to Own One. And he also teaches economics and law at the University of Missouri-Kansas City.
Thanks for joining us, Bill.
BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.
DESVARIEUX: Bill, just really quickly, can you explain to us what mortgage-backed securities are?
BLACK: Sure. So a mortgage-backed security is a bond, which is a big IOU. And what they do is buy many thousands of mortgages, and then they take the cash that comes from those mortgages when we pay interest and principal on those mortgages, and that cash flows through to whoever buys the bond. And what that means is if a bunch of people don't repay their mortgages, the people who buy these mortgage-backed securities, or MBS, lose a lot of money. And, of course, that's what happened in this crisis, because the lenders originated (that means made) so many fraudulent loans that produced massive losses.
DESVARIEUX: Okay. And because of these massive losses, now JPMorgan has to pay this $13 billion settlement. But it's really being reported as this big step toward bringing the banks to justice for their role in the financial crisis. Do you actually agree with that point of view?
BLACK: No. Indeed, in the introduction, which was an accurate statement of how the Justice Department is presenting this, it's actually inaccurate in many different ways.
So, first, most of this settlement has nothing to do with mortgage-backed securities. That's only one of what are reportedly nine different areas of fraud by JPMorgan that are the subject of this settlement. And that means that the Justice Department is giving up the ability to prosecute, apparently, in eight of these nine areas. And so this--again, we're talking on the basis of press leaks by the Department of Justice and by PR flacks for JPMorgan--we don't have an actual deal that's been made public. So all of this is tentative and could be factually inaccurate, because these people have an incentive to, of course, portray the deal differently.
But as it's being portrayed in the press, they are going to give up the ability to prosecute for literally tens of thousands of frauds committed by JPMorgan's folks, and they're going to give up the ability to prosecute JPMorgan as well as the individuals.
The settlement is not $13 billion, although it's being portrayed as that. It is at best $9 billion. And that's because the other $4 billion represents what we call loan workouts. Loan workouts are something that you do as a bank because if you try to insist on the original deal, the borrower can't repay, it goes to foreclosure, there are lots of losses. So in a loan workout you reduce the payments. And you do this not because of the goodness of your heart, but because the bank minimizes its losses by loan workouts. So what the Justice Department is agreeing is that JPMorgan can count all these loan workouts that it would have done anyway to minimize its losses as if they were part of a settlement. So disregard the $4 billion entirely.
That leaves us with $9 billion. But that $9 billion, unless there's something not being reported again, will be reduced substantially, probably by about one-third, because these fraud expenses will be taxed deductible. In other words, the United States of America will pay a third of this supposed fine from the JPMorgan frauds to the United States of America.
So roughly it's a $6 billion deal. That still, of course, is a large number, but compared to how much wealth was extracted by the senior officers and directors, it's actually not that big a deal, and compared to the losses they caused to the world through these frauds that drove the financial crisis, it's actually a pittance. But you knew that the Justice Department was never going to recover more than a small fraction of the damages that JPMorgan and others caused, because if they were to collect the damages, every large bank in America would be bankrupt.
DESVARIEUX: So, Bill, I just want to get back to your point about these settlements potentially being tax-deductible. Forbes is actually reporting that "The U.S. Public Interest Research Group thinks precluding JPMorgan Chase from claiming tax deductions should be explicit to safeguard taxpayers. The group claims that unless JPMorgan Chase is explicitly forbidden, it will write off the settlement. That would make taxpayers bear 35% of the cost of the settlement." So, Bill, what do taxpayers have to do with this? And why should taxpayers potentially be on the hook for this?
BLACK: Well, the United States government clearly should not be on the hook for this. It's--would be completely outrageous. And by the way, that would make it completely normal. And this is the high--one of the high but hidden prices we pay because they're not prosecuting the elite bankers and the elite banks for the frauds. If they prosecuted and if they got a criminal judgment for fraud, it would typically not be deductible, whereas when you do a regular civil settlement, the normal tax rule is that that's a business expense and it's deductible. And for an entity like JPMorgan--actually, I'm not sure that it would result in a 33 percent reduction, because JPMorgan pays so little in the way of taxes, but it certainly would end up in some deduction that would further reduce the supposed size of this fine.
DESVARIEUX: Okay. Well, thank you so much for joining us, Bill Black.
BLACK: Thank you.
DESVARIEUX: Thank you for joining us on The Real News Network.
William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC).
The reported $13 billion amount is a misrepresentation of the actual figure by the Justice Department and has “nothing to do with mortgage-backed securities,” said former financial regulator Bill Black.
“That's only one of what are reportedly nine different areas of fraud by JPMorgan that are the subject of this settlement. And that means that the Justice Department is giving up the ability to prosecute, apparently, in eight of these nine areas,” said Black.
Black also says the bank will be able to reduce the fine by approximately $7 billion through payment reductions and tax deduction.
“Roughly it's a $6 billion deal,” said Black. “That still, of course, is a large number, but compared to how much wealth was extracted by the senior officers and directors, it's actually not that big a deal, and compared to the losses they caused to the world through these frauds that drove the financial crisis, it's actually a pittance.”
JPMorgan can still face criminal charges despite the deal with the Justice Department.
Transcript:
JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I'm Jessica Desvarieux in Baltimore.
JPMorgan Chase will pay a $13 billion settlement to the Justice Department over charges that it sold toxic mortgage-backed securities that fueled the financial crisis of 2008. This $13 billion amount is the largest settlement of its kind, and it represents more than half of the firm's $21 billion in profits last year. Being the country's largest bank, JPMorgan can still face criminal charges despite the deal.
Now joining us is Bill Black. He's a former financial regulator and author of The Best Way to Rob a Bank Is to Own One. And he also teaches economics and law at the University of Missouri-Kansas City.
Thanks for joining us, Bill.
BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.
DESVARIEUX: Bill, just really quickly, can you explain to us what mortgage-backed securities are?
BLACK: Sure. So a mortgage-backed security is a bond, which is a big IOU. And what they do is buy many thousands of mortgages, and then they take the cash that comes from those mortgages when we pay interest and principal on those mortgages, and that cash flows through to whoever buys the bond. And what that means is if a bunch of people don't repay their mortgages, the people who buy these mortgage-backed securities, or MBS, lose a lot of money. And, of course, that's what happened in this crisis, because the lenders originated (that means made) so many fraudulent loans that produced massive losses.
DESVARIEUX: Okay. And because of these massive losses, now JPMorgan has to pay this $13 billion settlement. But it's really being reported as this big step toward bringing the banks to justice for their role in the financial crisis. Do you actually agree with that point of view?
BLACK: No. Indeed, in the introduction, which was an accurate statement of how the Justice Department is presenting this, it's actually inaccurate in many different ways.
So, first, most of this settlement has nothing to do with mortgage-backed securities. That's only one of what are reportedly nine different areas of fraud by JPMorgan that are the subject of this settlement. And that means that the Justice Department is giving up the ability to prosecute, apparently, in eight of these nine areas. And so this--again, we're talking on the basis of press leaks by the Department of Justice and by PR flacks for JPMorgan--we don't have an actual deal that's been made public. So all of this is tentative and could be factually inaccurate, because these people have an incentive to, of course, portray the deal differently.
But as it's being portrayed in the press, they are going to give up the ability to prosecute for literally tens of thousands of frauds committed by JPMorgan's folks, and they're going to give up the ability to prosecute JPMorgan as well as the individuals.
The settlement is not $13 billion, although it's being portrayed as that. It is at best $9 billion. And that's because the other $4 billion represents what we call loan workouts. Loan workouts are something that you do as a bank because if you try to insist on the original deal, the borrower can't repay, it goes to foreclosure, there are lots of losses. So in a loan workout you reduce the payments. And you do this not because of the goodness of your heart, but because the bank minimizes its losses by loan workouts. So what the Justice Department is agreeing is that JPMorgan can count all these loan workouts that it would have done anyway to minimize its losses as if they were part of a settlement. So disregard the $4 billion entirely.
That leaves us with $9 billion. But that $9 billion, unless there's something not being reported again, will be reduced substantially, probably by about one-third, because these fraud expenses will be taxed deductible. In other words, the United States of America will pay a third of this supposed fine from the JPMorgan frauds to the United States of America.
So roughly it's a $6 billion deal. That still, of course, is a large number, but compared to how much wealth was extracted by the senior officers and directors, it's actually not that big a deal, and compared to the losses they caused to the world through these frauds that drove the financial crisis, it's actually a pittance. But you knew that the Justice Department was never going to recover more than a small fraction of the damages that JPMorgan and others caused, because if they were to collect the damages, every large bank in America would be bankrupt.
DESVARIEUX: So, Bill, I just want to get back to your point about these settlements potentially being tax-deductible. Forbes is actually reporting that "The U.S. Public Interest Research Group thinks precluding JPMorgan Chase from claiming tax deductions should be explicit to safeguard taxpayers. The group claims that unless JPMorgan Chase is explicitly forbidden, it will write off the settlement. That would make taxpayers bear 35% of the cost of the settlement." So, Bill, what do taxpayers have to do with this? And why should taxpayers potentially be on the hook for this?
BLACK: Well, the United States government clearly should not be on the hook for this. It's--would be completely outrageous. And by the way, that would make it completely normal. And this is the high--one of the high but hidden prices we pay because they're not prosecuting the elite bankers and the elite banks for the frauds. If they prosecuted and if they got a criminal judgment for fraud, it would typically not be deductible, whereas when you do a regular civil settlement, the normal tax rule is that that's a business expense and it's deductible. And for an entity like JPMorgan--actually, I'm not sure that it would result in a 33 percent reduction, because JPMorgan pays so little in the way of taxes, but it certainly would end up in some deduction that would further reduce the supposed size of this fine.
DESVARIEUX: Okay. Well, thank you so much for joining us, Bill Black.
BLACK: Thank you.
DESVARIEUX: Thank you for joining us on The Real News Network.
William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC).
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