Wednesday, November 20, 2013

JP Morgan Fine

I heard on the news that JP Morgan> was just hit with a $13 billion Fine largely for misleading mortgages and mortgage backed securities leading up the the financial meltdown.

The reporter was a typical MSM drone who truly hated investment banks and took toward berating JP Morgan for all of their inherent evilness.

The report sounded odd to me. JP Morgan is an investment bank. It is not the type of retail establishment that originates loans. So, I decided to look up JP Morgan and the fine.

It appears that a large portion of the fines are related JP Morgan's purchase of Washington Mutual and Bear Stearns in 2008. Both acquisitions were prompted by the US Government.

A funny thing about Washington Mutual. It, along with Golden West, were praised at the most progressive banks of our generation. Both banks had absurdly lack lending requirements. Both banks routinely berated others for predatory lending, while engaging in predatory type lending themselves. Both banks had the habit of lending people money to pay their minimum balances. This type of action inflates the balance sheet while increasing instability. The two most progressive banks of the early 2000s had both created debt bombs which not only lead to bankruptcy but caused major legal problems for the banks that acquired them.

Washington Mutual was seized by the FDIC and sold to JP Morgan in September 2008 for $1.9 Billion. Apparently, JP Morgan later sold many of the mortgages to Fannie Mae.

Golden West was acquired by Wachovia at the time of the merger held the time "Most Admired" mortgage lender by Fortune Magazine. After the acquisition, Wachovia discovered the balance sheet was so thoroughly distressed that Wachovia was forced into bankruptcy and later acquired by Wells Fargo. Wachovia swallowed a poison pill.

I am not a fan of JP Morgan. However, I believe that responsible reporting on this current fine would report the amount of the fine that resulted from the acquisition of Bear Stearns and Washington Mutual.

The one great danger of this current fine is that the government is setting a precedent of levying huge fines on the buyers of troubled assets for the sins of the people who created the troubled asset. This type of precedent could make things worse in the next round of financial troubles.

I am no fan of JP Morgan. It is too big. The acquisition of troubled assets in the financial meltdown was rife with financial mischief. Washington Mutual had billions in unpaid taxes. I am simply stating that reporting of fines resulting from a merger should include details on the merger.

Think of it this way. Imagine you bought an icepick at a garage sale. Police later identify it as the murder weapon. Are you guilty of murder? Mergers and Acquisitions is a complex topic. The players on Wall Street are adept at leaving small investors holding empty bags while they run off with the loot. In the world of finance, the people who engage in misdeeds are rarely the people who pay for the misdeeds. I am not celebrating this fine or seeing it as an application of justice. I wish Americans would realize that small is better and move away from dependence on big banks.

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