Curious Capitalist

Money Talking: JP Morgan’s $11 Billion Would Send the Wrong Message

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JPMorgan Chase chairman and CEO Jamie Dimon.

Is $11 billion a lot to pay for causing some of the mischief that caused the financial crisis? That’s what Justice Department officials in Washington are currently trying to decide. The $11 billion in question is the potential price tag for banking giant JP Morgan to settle scores of investigations and charges by various federal and state agencies. Those bodies are looking into how the bank handled mortgage-backed securities before the financial crisis. The idea is to cut one big check, and be done with the fallout from the crisis. The bank is currently in “constructive” discussions, and an agreement may be announced within days.

So how much is that $11 billion, really? To put it in context, that’s about how much profit Google made last year. It’s more than two and a half times what energy giant BP paid to settle claims after the oil spill in the Gulf of Mexico. It would be largest settlement by a single company with the Justice Department ever.

It’s also what JP Morgan earns in profit about every two quarters. While many pundits have been saying that an $11 billion settlement would indeed represent justice for some of the mistakes made during the crisis, I’d disagree. In fact, I think it sends an odd message, which is that massive fines substitute for clear banking rules, smart post crisis re-regulation of the sector, and pro-active industry watchdogs. Despite the immense numbers being tossed about, it’s worth remembering that JP Morgan was hardly the worst banking actor over the last several years—they just made a particularly bad trade, at a time when there’s a growing conversation about how easily banks have gotten off after wrecking the real economy.

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Indeed, until its London Whale trade went bad, JP Morgan was known for being one of the best risk managers in the business. But the problem with risk management is that it’s often more art than science: you throw a lot of numbers in a big black box and shake them around and pretend you can tell what all the thousands of variables are going to do. But nobody—not even the financial rocket scientists doing the algorithmic computations at big banks—can. At least not all the time.

That’s why I think that any size settlement, even an $11 billion one, doesn’t make up for the fact that five years on from the crisis, we still don’t have rules that forbid large federal insured institutions from doing the sort of risky proprietary trading that got JP Morgan in trouble. Until we do, you can bet there will be more monsters lurking out at sea.

For more on the JP Morgan settlement, and what else might be coming down the pike in the banking sector, listen to the latest episode of WNYC’s Money Talking, with myself and New York Times correspondent Joe Nocera.

8 comments
HangDiver
HangDiver

These guys took government (tax payer) bailout money during the crises, and now will pay the $11 billion fines with shareholder money in exchange for ending civil and criminal investigations by the government. Shouldn't all criminals be afforded the same resources to buy their way out of jail?

sixtymile
sixtymile

Good points... The basic question seems to be whether the fine is for "doing wrong" or "guessing wrong".  If it's "doing wrong" then the penalty should be much greater. If "guessing wrong" then let's stop guessing the market with federally insured funds.

drericl
drericl

Mischief??   Thats the word you want to use ? Mischief???????    How about fraud, theft,  con, stealing, .  There you go , fixed it for you.

bryanfred1
bryanfred1

The entity making the "Whale" trades was not insured by the U.S. government.  Just because the same bank holding company is over both entities doesn't mean we're on the hook for proprietary trading losses. 

Regarding the subprime mess, if I'm JP Morgan I pay the fine just to get it all behind me.

Sparrow55
Sparrow55

$11 billion is a lot of money.  For the banks, however, it's just the cost of doing business.