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J.P. Morgan’s $13 billion penalty

October 20, 2013 at 12:00 AM EDT
A tentative deal was reached yesterday between the Justice Department and JP Morgan Chase. The agreement would require chase, the nation's largest bank, to pay a record 13-billion dollar penalty. Dawn Kopecki, a banking reporter with Bloomberg News, who has been following the Chase story for some time provides analysis.
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HARI SREENIVASAN: JP Morgan Chase reached an agreement with the Department of Justice to pay a $13 billion fine in the largest settlement paid by a financial firm to the U.S. Bloomberg News reporter Dawn Kopecki joins Hari Sreenivasan to talk about the record settlement and J.P. Morgan’s brushes with the Department of Justice.

For more on this we are joined now by Dawn Kopecki, she is a banking and finance reporter with Bloomberg News who has been following the Chase story for some time, so besides the thirteen billion dollar number, why is this so significant?

DAWN KOPECKI: Well it’s, we’re seeing kind of a sea change for Wall Street and its relationship with Washington, the Obama administration has gotten nothing but criticism for not going after banks hard enough, for the financial crisis, and now what you’re seeing is a little bit of catch up. Some analysts think that because banks are healthier now, they’re better positioned to absorb these losses, that’s why you’re seeing the administration kick up pressure on them, you’re also seeing, for J.P. Morgan, this resolves a number of investigations but it doesn’t resolve everything, this resolves about five different investigations against J.P. Morgan, one of which was an actual lawsuit from the Federal Housing Finance Agency, that was for losses that Fannie and Freddie incurred on bad loans from buying- that they bought from J.P. Morgan, from Bear Stearns, from Washington Mutual, which they bought those two entities during the crisis and so you’re seeing a very dramatic and very tough stance in Washington against bankers in general.

HARI SREENIVASAN: So part of that is a fine that says- in the fine is four billion dollars in relief for consumers, what’s that mean?

DAWN KOPECKI: You know, we’re not quite sure how that’s going to be structured yet, what we do know for sure, well, what we’re trying to figure out really, actually is how it affects bond holders because the people who lost money on these investigations are the bond holders. But it doesn’t look as good if the U.S. government gets money back for billionaires like Bill Gross at Pimco, and so what we believe they’ve done is structured some sort of mortgage relief, maybe principal reduction, maybe interest rate reduction, it doesn’t hurt the bank as much when they structure it that way, so the bank can give more money towards that because it’s tax deductible, and they also I don’t believe have to recognize all those costs up front, and so that’s what we’re trying to figure out.

HARI SREENIVASAN: So one of the distinctions inside this is that Chase is not immune from criminal investigation. Why that clarification and is that going to have an impact for investors on Monday?

DAWN KOPECKI: It may have an impact for investors, not likely necessarily immediately on Monday, you may see the stock move a little bit, but the impact would be later on if the Justice department decides to go forward with some sort of deferred prosecution agreement, Chase is already under a deferred prosecution agreement for activities in selling bonds in Alabama, to municipalities there and so their municipal bond sales practices have already come under criminal scrutiny and they’re already under an agreement there, this would be another similar type of investigation with the same kinds of ramifications, also executives might be at risk as well.

HARI SREENIVASAN: Right, speaking of executives, Jamie Dimon has been kind of a polarizing figure, one the one hand Chase has had 70 percent stock growth since the financial crash in 2008, on the other hand it’s just penalty after penalty after penalty.

DAWN KOPECKI: It is, J.P. Morgan has gotten credit from investors and you know, large investors and its board of directors, for being a good manager for being able to make money they made a record 23.1 billion, they’re the most profitable bank in the U.S. one of the most profitable banks in the world, so there’s no disputing that, however it is penalty after penalty after penalty, and these aren’t investigations that the government made up, this is things that the company has actually done wrong in some cases admitted to wrongdoing, they admitted to manipulating energy markets in California, they admitted to mistakes in the London Whale loss last year, they’re under investigation for their hiring practices in Asia, there are a whole host of things and the company is trying to tighten its internal controls but what some people have thought is maybe they weren’t in as much scrutiny before because they’re so well managed, and now this is just the federal government catching up to all that.

HARI SREENIVASAN: Dawn Kopecki from Bloomberg, thanks so much.

DAWN KOPECKI: Thank you.