By PAUL MCMORROW
By PAUL MCMORROW
New York Times News Service
JPMorgan’s recent $13 billion federal mortgage settlement shattered all kinds of records. The settlement, which closes the books on a laundry list of wrongs dating back to the housing boom’s frothiest days, isn’t just the largest penalty to emerge from the wreckage that marked the boom’s abrupt end. JPMorgan agreed last week to part with more money than any one company has ever paid the government to make a federal case go away.
Thirteen billion dollars is an enormous sum, and it’s impossible to say JPMorgan’s record fine is too little. Still, it came far too late to do much good.
Last week’s JPMorgan settlement covers crimes that were routine in the years leading up to the 2008 economic meltdown. Wall Street banks paid mortgage companies to flood the country with unsustainable debt. They often knew these mortgages were suspect, but didn’t care. Because the banks were packaging shaky mortgages into bonds and selling them to their customers, the banks themselves didn’t stand to lose anything when these mortgages soured. Big banks were offloading risk, concealing the true state of shaky subprime loans from investors, and collecting fees for their troubles.
The settlement covers its part in this game, as well as the parts of Bear Stearns and Washington Mutual, two failed banks that JPMorgan absorbed in 2008. They weren’t alone, though; scores of post-crash lawsuits have alleged that all of Wall Street was working from the same playbook. In settling, JPMorgan acknowledged the government allegations, but didn’t admit to any wrongdoing.
It’s taken years to bring the country’s biggest financial houses to account for their roles in wiring the time bomb that leveled the country’s economy five years ago. In addition to last week’s JPMorgan settlement, UBS, Citigroup, GE Capital, and Wells Fargo have struck smaller mortgage deals with the feds, while a federal jury recently handed Bank of America a rare guilty verdict in a civil fraud case.
These recent regulatory victories mask an unsettling fact: Banks have already won the wars over how aggressively government regulators can act in guarding against the next housing implosion. They’ve resumed bad old habits, delayed key safeguards for years, and knocked Wall Street’s would-be sheriffs back on their heels. They’ve created an environment where the forces that created the last housing bust own the high territory, and reformers are left to scratch out ground and celebrate half-victories.
Congress tried, in 2010, to eliminate bank bailouts and head off future financial collapses. The 2010 Dodd-Frank act has led to the elimination or marginalization of the worst kind of housing loans. The Consumer Financial Protection Bureau has passed rules eliminating no-documentation mortgages, and requiring lenders to only hand out loans that borrowers have the ability to repay. These two rules alone would have eliminated the worst of the toxic mortgage bonds Wall Street sold from 2005-2007. The CFPB has extended some legal protections to lenders that take further steps in eliminating exotic, risky mortgage features.
These are laudable moves toward normalizing the mortgage market. So it’s a symptom of the dysfunction that has followed the housing bust that the CFPB has been under near-constant attack since its conception.
Big banks have fought tooth and nail against the Volcker Rule — a proposed regulation that would prohibit banks that enjoy federal deposit insurance, or access to cheap Federal Reserve money, from gambling on the public dime. The Volcker Rule wouldn’t outlaw financial gambling, but just insist that Wall Street institutions can’t be both banks and hedge funds.
The banks have also led a charge to keep derivatives as lightly regulated as possible. Intense lobbying has left new regulations on derivatives more than two years overdue, and last month, the House passed a measure that would exempt nearly all banks from having to house risky derivatives off their main books; the measure was written with the help of Citigroup lobbyists.
This is the mentality that has dominated Wall Street’s encounters with lawmakers and regulators since the housing bubble burst: Anything that closes off a return to the old days is bad for business. Even worse for business, it appears, than the occasional $13 billion settlement payment.
Paul McMorrow is an associate editor at Commonwealth Magazine.