In politics, there's a saying about what gets you in hot water: it’s not the crime; it’s the cover-up. In the financial industry you might say: it’s not the crime; it’s the clean-up.
The clean-up period – the financial and moral reckoning that can last up to a decade – is when you get to see what a bank and its culture are made of: whether they respond with remorse (rare), with distancing hubris (frequent), or with lavish payouts (always).
JP Morgan just paid a $13bn fine to settle charges that it sold bad mortgages to investors and government agencies. The bank didn’t admit to breaking the law, but it agreed it misrepresented the quality of mortgage securities that it sold. Such an admission and such a large fine, being the biggest in US corporate history, would seem to draw a line under the whole sordid mortgage affair – but, as events of the past week have shown, the bank’s clean-up is really just beginning.
There are, inevitably, more fines and lawsuits to come this year. Harry Fong, a managing director with Wall Street research firm MKM Partners, suggested that the settlement might prove good news for others waiting to sue JP Morgan as well as its rivals: “The headlines of the settlement certainly seem to favor counterparties still in litigation against JPM and other banks,” he wrote, though he also cautioned that the courts may not be sufficiently moved: “But headlines are not judicial rulings.”
It will all come at a cost. JP Morgan recently announced its first loss since 2004 due to legal costs, and Barclays analyst Jason Goldberg estimates that the bank’s remaining $23bn reserve for legal costs will cover potential lawsuits that are yet to be settled. Goldberg suggests that even with the money JP Morgan has already set aside, there’s still $13bn in its vaults to cover potential litigation.
Still, there is no small number of people waiting to get satisfaction from JP Morgan. The banks faces class-action lawsuits and legal actions by insurance companies and investors disputing insurance on mortgage loans.
In addition, as Goldberg point out, there’s a litany of other troubles waiting in the wings, some in their early stages and some close to wrapping up: federal regulators are still investigating some of JP Morgan’s employees about the London Whale losses; the FBI and the Department of Justice are trying to figure out if JP Morgan did enough to alert investors about the Bernie Madoff fraud; and there are other government investigations around money-laundering, debt collection, a criminal investigation by the Department of Justice around energy-market manipulation, potential issues around hiring children of Chinese officials; and a brewing multi-bank investigation in currency markets.
Then there is the reputational clean-up, which is much harder than paying a fine. Last week, there was a debacle in which JP Morgan welcomed career questions for one of its top bankers by asking Twitter users to send queries with the #AskJPM hashtag. It backfired, as users hurled abuse at the bank: “When can I get my house back?” wrote one wag. Another wit suggested that the bank could advise him whether he was fully diversified … in financial malfeasance.
Many people attributed the #askJPM catastrophe to JP Morgan’s misunderstanding of social media. It was not. It was a misunderstanding of the depth of public outrage against the bank and the depths to which its reputation had fallen since the financial crisis. For a few hours, JP Morgan was in the stocks, and you could tell that there was a public hunger for more mockery, if not outright punishment.
Will any of this affect the tenure of the bank’s charismatic chief executive, James Dimon? Probably not. Goldberg believes Dimon’s job is secure – “we expect Dimon to remain CEO for the foreseeable future” – and so do many others.
There are a few reasons for this. The most compelling is incumbency: if all this – the London Whale, the enormous settlements – couldn’t shake Dimon’s control, what will?
There’s also a widespread belief that the pool of people able to lead a financial behemoth is small to non-existent, and the long and painful searches in the past for CEOs at Citigroup and Bank of America support that view.
In addition, Dimon has the support of his board, who may recognize that their support of him in the past means their fortunes are tied to his. One board member said earlier this year that “we’ve got these things that we actually are guilty of and we’ve got to fix them.”
That level of self-awareness was considered a rare break from form – and even a faux pas – for JP Morgan. But what it did was acknowledge the truth. The entire financial industry could use more of that. Until it does, there will be no end to the true costs of the clean-up.
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