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JPMorgan Says It Broke No Law. So Why Pay The $13 Billion?

The U.S. government says JPMorgan Chase & Co. knowingly sold faulty mortgage-backed securities in the years leading up to the financial crisis. The bank says it's broken no laws.
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The U.S. government says JPMorgan Chase & Co. knowingly sold faulty mortgage-backed securities in the years leading up to the financial crisis. The bank says it's broken no laws.

State and federal regulators have hailed Tuesday's $13 billion settlement with JPMorgan Chase & Co. over faulty mortgage assets it sold in the years leading up to the financial crisis as a big victory for the judicial system.

But like other big settlements to emerge from the financial crisis, the deal leaves unclear just what the bank did wrong.

The government alleged that the bank and two other financial institutions it later acquired were repeatedly warned about the quality of the mortgage assets that were sold — but never did anything about it.

"The conduct JPMorgan has acknowledged, which is packaging risky home loans into securities, then selling them without disclosing their low quality to investors, that is behavior that we believe contributed to the wreckage of the financial crisis," Tony West, associate U.S. attorney general, said this week.

The government spelled out its case in a statement of facts that JPMorgan agreed to sign. But even as the bank was acknowledging its conduct, it was also proclaiming its innocence.

"The firm has not admitted to any violations of the law," Marianne Lake, JPMorgan's chief financial officer, said in a conference call Tuesday.

Lake and CEO Jamie Dimon repeated that several times: No violations of the law. At the same time, the bank signed an agreement that U.S. officials say suggests a pattern of misleading investors.

So who's right?

"We're in an age of spin, and I think the answer is, everybody is right," says securities lawyer Jacob Frenkel. He says the statement of facts at the heart of the case is artfully worded so that both sides can walk away claiming a victory of sorts.

JPMorgan Chase, for instance, gets to settle the case and move on. But it doesn't admit anything that might come back to haunt it later on — like in one of the private lawsuits it faces, for example.

"This language really was crafted very carefully to ensure that the closure of these cases could not then be used in some other proceeding in a way that actually becomes a sword with which to stab JPMorgan yet again," Frenkel says.

But there's plenty in the statement of facts to hint at some degree of misconduct by JPMorgan. Jimmy Gurule, a former official with the Justice and Treasury departments who now teaches at Notre Dame Law School, points to one example, in which a bank official warned about the poor quality of one of the underlying mortgages in a security sold by the bank.

Her warnings, the statement says, were disregarded.

And Gurule says there are lots of examples like that. "It's a consistent pattern that demonstrates that high-level officials at JPMorgan had knowledge that the loans that they were pulling together and selling were high-risk and there were likely to be substantial defaults," he says.

But juries are unpredictable, and it's not clear whether this evidence would have held up in a court trial. Justice Department officials clearly decided not to take the gamble.

And weighing heavily in their calculation was another big factor: As Gurule points out, the government also walked away with a huge amount of money. The record settlement generated plenty of headlines and, to the public at least, it undermines the bank's claims of innocence.

"It's absurd for JPMorgan to suggest that it didn't engage in any criminal wrongdoing, but yet agreed to pay the Department of Justice $13 billion," Gurule says.

That said, the financial penalty isn't quite as costly as it appears for the bank. For one thing, much of it is tax-deductible. The settlement also comes at a time of mounting criticism about deals like this — deals that allow financial institutions to dispose of allegations without admitting wrongdoing.

Mary Jo White, the new head of the Securities and Exchange Commission, said she wants to avoid such deals when possible. But this week's settlement suggests they're not going away anytime soon.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

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Jim Zarroli is an NPR correspondent based in New York. He covers economics and business news.