Chase Punished For Purchasing Bad Mortgages. The Problem Is The Mortgages Were Issued Prior to 2008 And Government Pleaded With Chase To Help Them Out And Take Over The Bad Loans.

We learned over the weekend of the 13 Billion dollar "settlement" with the government over the bad mortgages that JP Morgan Chase had in its portfolio. They are the first of the big banks to be punished for the loans. 

Now we do agree that these loans were indeed bad, however, the Chase story has an interesting piece that hardly has made the news. Most of these loans were acquired prior to 2008 from Washington Mutual and Bear Stearns. The same goes for Bank of America's acquisition of loans from Countrywide.  

In the case of Chase, the government implored Chase to take over these loans as a failure by either Washington Mutual or Bear Stearns would have crippled the economy. Jamie Dimon agreed to the purchase "for the benefit of the country."  Now the company is paying with 50% of its 2013 income.  

So you say, that was a stupid move by Dimon and we would agree. However, this is not the first time that this tactic has been used. We were involved with a Savings and Loan in the early nineties that experienced the same "generosity" by the Feds.  This company had a strong balance sheet and was very stable according to government regulators.  Due to its strength, they were asked to take over a failing S&L in Florida. The Chairman of the Board (who we knew personally) protested saying that if they did as the government wished, they would be weakened to the point that they might be taken over.  

The officials who were dealing pressured the management to do the takeover and assured the Chairman in person and by letter that they would insulate the company from any adverse actions to their helping out the Feds. The deal was done.

Six months later, the formerly stable S&L received a letter saying that their financial health had so deteriorated (the assets from the bank they had taken over were counted in their asset mix) in the six months since taking over the other company, that the Feds were taking them over to "rehabilitate them" and to protect their depositors.  Of course, the company protested and sued but to no avail. They were out of business within months.

So what happened to the letter of assurance that the Feds had given them? The government said that the persons who wrote the letter did not have the authority to make those assurances.  In other words, they were pressured and tricked into making a bad decision.  Of course, the men who gave the letter still have their jobs but the entire S&L staff lost their jobs.

Dimon made a bad decision in an attempt to help the economy. Does anyone really think that will ever happen again? It will as it is very hard to battle a regulator who has your life and the future of your company in his hands. If you don't do as they wish, they will make your life miserable and can easily ruin your business. The government has unlimited resources to expend against you while any company, even Chase, has a limit. Does anyone really want to battle the government?  Not most.

So before you jump for joy that Chase is getting its "well-deserved medicine", think about how they got there. It is not always as clear as it might seem.  

Conservative Tom

J.P. Morgan Chase Settlement Benefits Obama Allies

Monday, 21 Oct 2013 10:53 AM

By Audrey Hudson

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The tentative $13 billion settlement between J.P. Morgan Chase and the Justice Department is an extortion scheme to benefit the Obama administration's political supporters and likely will backfire the next time government needs the financial industry to bail it out of a crisis, Wall Street Journal editorial writers say.

"Federal law enforcers are confiscating roughly half of a company's annual earnings for no other reason than because they can and because they want to appease their left-wing populist allies," the Journal said in an editorial Monday.

The agreement would settle the allegation that the company issued faulty mortgage bonds, but, the Journal argues, the securities were issued before the 2008 financial panic and were not all Morgan products, but also issued by Bear Stearns and Washington Mutual.

The government pleaded with J.P. Morgan to take responsibility for those products to help them ease the crisis, the Journal noted.

Fast forward five years, and now the feds are punishing the company and Morgan CEO Jamie Dimon for coming to their rescue.

"We'd like to see Mr. Dimon fight the charges, but the political reality is that he and his bank don't have much choice . . . The government will only turn the screws harder if he resists," the editorial said.

For justice to be truly served, former Democratic Rep. Barney Frank and others — who blocked reforms to Fannie Mae and Freddie Mac and the Federal Reserve for establishing the easy-credit scheme — would have to be held accountable, the Journal continued.

"The lesson is how government has used the crisis to exert political control over even the most powerful private financial companies. The real lords of American finance are Attorney General Eric Holder, Treasury Secretary Jack Lew and their boss in the White House," the Journal said.

The newspaper also observed that proceeds from the settlement could be used in a political shakedown scheme to financially aid advocacy groups that support Obama and the Democratic Party.

"Perhaps the administration will have the checks arrive in swing Congressional districts right before the 2014 election," the editorial concluded.

Related Stories:

US 'Robbed' JPMorgan, Payback for Criticism of Obama

Morici: Obama Targeted JPMorgan — Why?





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