JPMorgan response to DOJ settlement sends crucial message
Admission of guilt would unleash a flood of lawsuits
JPMorgan Chase (JPM) CEO Jamie Dimon may be eager to get all of the company's legacy mortgage issues behind it, but how the bank responds to pressure from the Department of Justice and other regulators is a potential harbinger of what’s to come on the mortgage litigation front for mega banks.
Over the weekend, news broke that in addition to a multi-billion dollar settlement with the Federal Housing Finance Agency to end MBS claims, JPMorgan is in talks to pay the Department of Justice billions of dollars, helping it resolve a series of government mortgage claims for a total of $13 billion.
Richard Bove, an analyst with Rafferty Capital Markets, believes what Dimon and JPM do from here is a growing concern.
"We have no idea what’s going on," he told HousingWire, pointing out that most of the details about the settlement are coming from government leaks.
"The people who are supposed to pay this fine – the shareholders of JPM – are not guilty of anything," Bove added. "None of this is being done in the public domain."
And the legal risks may not end with a mega $13 billion deal. Forbes highlighted a very uncomfortable truth Monday—the government is apparently hesitant to relinquish its ability to file criminal charges against JPM or company representatives. With this in mind, even a major settlement comes with more risk for the bank and other firms, Bove said.
"If JPMorgan is stupid enough to pay this $13 billion – and I don’t think they have a right to pay without a vote from the shareholders – it will set up the possibility of thousands of lawsuits," Bove said. Those lawsuits could then end up costing the bank billions of dollars more, he suggested.
He added, "If the company admits guilt, then the likelihood of it paying huge amounts of money is very great."
Analysts and news reports have suggested the large settlement is the result of a falling out between CEO Jamie Dimon and the Obama administration. But another concern lingers: if this is not a vendetta involving just JPM, other banks need to be prepared to land on the hook, Bove suggested.
"It has to apply the same precedent to other banking companies,” the analyst noted. And according to Bove, that would mean looking twice at Bank of America's (BAC) mortgage exposures through Countrywide, and exposures picked up by Wells Fargo (WFC) for buying Wachovia. Not to mention, PNC’s lingering mortgage issues from buying National City, Bove pointed out.
Mike Mayo, an analyst with CLSA, released a report on JPMorgan Chase after the bank reported an unexpected third-quarter loss on a $9 billion legal provision.
At the time, Mayo said traditional banking within JPM remains sluggish, while the firm remains at risk from the three 'Ds' – deleveraging, de-risking and disclosures — with its legal reserves at $23 billion and the expectation that those reserves may go another $6 billion higher.