It all started during 2006 when the US Justice Department came up with discovery of meeting of JP Morgan Executives where despite of red flag signals from US department, the officials continued selling shoody mortgage securities. JP Morgan- one of the largest banks in US, came to mutual agreement with US Government Officials to pay $13 billion as part of civil settlement against charges over JP Morgan. . The record penalty was the result of investigation held by Securities and Exchange Council and US Justice Department where they found that the big national banks were responsible for fueling the financial crisis. As for JP Morgan, where they acknowledged that indeed it told its investors about the mortgage loans in securities it packaged and sold although they were told by its employees of its loan quality, this gives a valid proof that national banks were indeed responsible for mortgage meltdown. However, these criminal charges on JP Morgan had both pros and cons in its own sense for the financial world and big banks.
1)No one is above the Law:
After the time of financial crisis, JP Morgan was not the only national bank in US which got involved in trade of toxic loans related to mortgage. Before JP Morgan, it was Goldman Sachs-another large US Bank that faced the allegation of manipulating the trades in its own self interest, ended up in favor of SEC while Goldman Sachs were asked to pay $500 Million during late 2011 in a deal called Abascus 2007-AC1 where the bank were alleged to mislead its investors on a deal related to Collateral Debt Obligation(CDO). The above investigations and legal involvement by SEC and Justice Department sent a message to the whole financial system in US that there is no bank, no matter how big it is in volume traded, is not above the law and cannot get away for misleading its investors at any cost. This again puts the US legal system one of the most efficient around the globe.
2)Helping Struggling Borrowers:
Of the total $13 billion agreeemnt, government has made it mandatory for the Bank t spend atleast $4 Billion on ‘’consumer relief’’ by helping borrowers and neighbours that are struggling the most till 2017.As per the agreement signd by JP Mrogan and justice department here is the list as how and who will benefit from the spending in Consumer Relief:
-Struggling Homeowners whose mortgages are served by JP Morgan:
JP Morgan will be helping the borrowers who are behind in their payments. The provision will be helpful for the borrowers especially who are now under water i.e they owe more than what their house value is becasue of housing market burst post financial crisis arena. For the same purpose, JP Morgan will get credit for forgiving part of the outstanding mortgage bills of non-performing loans and also for allowing a forbearance a part of delay in foreclosure for underwater mortgage loans that dont qualify for principal forgiveness. The bank can also claim credit for cutting interest rates for borrowers who are behind their scheduled debt payment obligations. All these provisions are going to benefit the final retail borrower itself.
-Community Development Programmes:
Of the total agreed settlement amount, JP morgan is also obligated to serve community development and reinstate delapidated demolished properties.
-Helping Struggling Borrowers whose mortgage service donot participate in HAR Programme:
JP Morgan will also be able to get credit for helping homeowners whose house values have fallen below their mortgage balance but their loans are with mortgage companies that do not participate in US Government’s Home Affordable ReFinance Programme(HARP) and are thus unlikely to qualify for a refinance on their own. Thus, JP Morgan will get credit for taking on those customers and refinancing them at lower rates.
-Social and Military Contributions:
Bank will also get credit for donating bank owned homes to a person in military services with disabilities or if he/she is relative of deceased service members.
– Housing Non-Profits and land banks:
JP Morgan will get credit for donating bank-owned homes to non-profits organizations who work with mission of keeping people in their home.
Although the Justice Department has directed JP Morgan to involve in such activities and spend $4Billion on consumer spending by 20-17 and has also set up a team to monitor the performance of the Bank regarding their settlement obligation, JP Morgan has assured that it will finish its work an year ahead.Thus, such regulations put forward by Justice Department on JP Morgan are more rational as they are directed towards development of society and affected investors who at one time were largely affected by purchase of sick mortgage loans on advice of JP Morgan.
The criminal charges against JP Morgan by the US Justice Department will indeed have a substantial effect on the whole financial services industry. The criminal charges and then the urge of JP morgan to offer more and more amount to reach the settlement is a signal for the banking and financial services industry that even if any of the transaction carried by them is legal but the transactors knew that such transactions will deceive the investors, in such case, the financial institution will be held responsible. However, first the criminal charges and then multi-million dollar settlements indeed have negative effects associated with it:
1)Effect on Shareholder’s Wealth:
Although, JP Morgan was able to get away from further civil investigation against the criminal charges against its sub-prime mortgage sales, it will be the shareholders of JP Morgan that will be atmost affected. JP Morgan is having huge capitalization of $215 Billions and large share volume is traded under its name on New York Stock Exchange(NYSE). Thus, any such charges or negative news about the company will lead to fall in value of the shares of the company and ultimately affecting the share value. Thus, where at one point JP Morgan is forced to be a part of community development and helping the borrowers as per directions of Justice Department, fall in value of their stock prices will negatively affect the other sections of society i.e their shareholders.
2)Risk of Bank Losing their licenses:
If it was the luck of JP Morgan that it got away from further investigation and settled the case by paying $13 Billion as a penalty. However, if in case it is proved that a financial institution or bank indeed got involved in fraudulent trading or investment advice, it could have lead to risk of bank losing their license to operate. Thus, in such case a whole macro economy would disadvantage.
3)Limited Innovative Transactions:
With such deep scrutiny of transactions by SEC and Justice Department, the financial institutions will now limit their innovation of financial transactions offered to their investors. In other words, even if the financial transaction is legal and fair in every aspect, out of fear of criminal litigation, the company may not advice its invetsors over such transaction which they think will be beneficial for the investor.
4)Pay fine and get away:
Although the SEC proves that it is now revitalized, but the criminal charges and then the settlement takes out a negative message that these financial institutions can get away by just paying a fine which they can afford. Many industry analyst cites that SEC and Justice Department accepted the settlement because they could not go ahead further with the investigation. This gives a wrong message to the investors as under the capacity of settlements, they will still not be confident about their interest being promoted in the investment world.
5)Risky transactions are part of doing business:
SEC settlement with JP Morgan also indicates a negative view that the risky transactions are cost of doing business. JP Morgan is said to have earned millions of dollars from the sub-prime mortgage sales and thus financial institutions were able to balance the risk of paying penalties versus the benefits of receiving revenues for the deceiving finance transactions.
Barrett, D. (2013, November 20). J.P. Morgan Is Haunted by a 2006 Decision on Mortgages. Retrieved December 1, 2013, from Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702303755504579208350707595282
Eaglesham, J. (2011, January 22). Bank Fine Hints at Feds' Playbook. Retrieved December 1, 2013, from Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702303936704576399801103678040
PAterson, S. (2013, October 24). J.P. Morgan Criminal Case Could Trigger OCC Action. Retrieved December 1, 2013, from Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702304682504579156022095052420
Rexrode, C. (2013, November 13). What J.P. Morgan’s $13 bln settlement means for neighborhoods, struggling homeowners. Retrieved December 1, 2013, from Marketwatch-the Wall Street Journal: http://blogs.marketwatch.com/thetell/2013/11/21/what-j-p-morgans-13-bln-settlement-means-for-neighborhoods-struggling-homeowners/
VaughnReynolds. (2013). JP Morgan Settlement:Impact on Financial Indsutry. VaughnReynolds.