Richard Epstein, "In Defense of JP Morgan"
JP Morgan Chase (JPM) just had a bad week dueling with the federal government. First, it got slapped with a $5.1 billion settlement with the Federal Housing Finance Agency (FHFA) for its mortgage dealings with Fannie Mae and Freddie Mac; then, it got wrapped into a criminal investigation involving Bernie Madoff’s Ponzi scheme, which the government now insists that JPM should have detected in its role as Madoff’s banker before the scandal broke.
The financial toll of the various government initiatives against the bank is likely to top $25 billion, a sum that places a substantial dent even in the bank’s hefty capital structure. The reputational and business losses could amount to far more. The adverse consequences could wreak havoc on thousands of employees, customers, and shareholders. In both civil and criminal proceedings, the Department of Justice is bringing to heel a bank that came into two major mistakes. First, the bank did business with the federal government. Second, it was regulated by it.
The FHFA Settlement
Last week, JPM entered into a $5.1 billion settlement with FHFA, which took over the operation of both Fannie and Freddie when the two companies were forced into an unwanted conservatorship by FHFA and the Treasury at the height of the financial crisis. I have commented critically in an earlier column, Grand Theft Treasury, on the high-handed and indefensible nature of this transaction, which was crammed down the throats of Fannie and Freddie’s preferred and common shareholders on terms all too favorable to the federal government.