Curious Capitalist

JP Morgan’s $1 Billion Suit Will Be The First of Many

In lieu of clearer financial regulation, we’ve got lawsuits—which do little good

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Jerome Favre / Bloomberg / Getty Images

JP Morgan is suing the FDIC for $1 billion worth of fines over bad loans connected with WaMu, a firm that it acquired during the financial crisis at the behest of the government. I predict it will be the first of many such suits, as the dust from the financial crisis continues to settle, and the public and private sector wrangle over who is to blame for what happened.

As I’ve written before, I wasn’t in favor of the massive fines against JP Morgan to begin with. To me, what’s needed is not monetary retribution (the total $13 billion in fines that JP Morgan has been asked to pay by Justice Department over bad loans made during the financial crisis, while large, amounts to only two quarters worth of profit for the bank), but clearer rules of the road for banks, which would help not only reduce risk, but also potentially increase lending. See my analysis of why the recently passed Volcker Rule doesn’t get us there, here.

In lieu of clearer rules, we’ve got lawsuits, and as well as a continuing debate over what portion of the clean up costs of the crisis should be paid for by the public versus the private sector. If history is any indication, it’s a battle that will rage for years. Consider the sovereign default, twelve years back, by Argentina – the government is still squaring off against banks that believe they got a raw deal because they were forced to take a haircut during debt restructuring.

Witness what happened last spring in troubled Cyprus, when it seemed that mom and pop deposits would be left holding the biggest chunk of bailout costs, while Russian tax evaders and big banks got off scot-free. And look at how battles over public and private responsibility in bankrupt California cities like Stockton and San Bernardino have raged for years. The same thing will likely happen in Detroit, as banks and pensioners continue to square off over who has to take a haircut in the city’s bankruptcy. One group that’s guaranteed to get paid – the lawyers.