The JPM case isn't over yet

An admission of culpability and on-going criminal investigation mean that JPMorgan Chase's $13 billion settlement isn't the end of its legal troubles over bad mortgage securities.

The $13 billion settlement between the Department of Justice and JPMorgan Chase over bad mortgage securities is certainly historic, but it doesn't put matters to rest.

No question, the size of the deal is significant, representing half of JPM's annual profit. But CFO Marianne Lake told investors on Tuesday that $7 billion, or more than half of the total fine, is tax deductible, not that that means a dollar-for-dollar reduction. (JPM's effective tax rate last year was 29 percent.) And the company dropped its gambit to get the FDIC to cover $4 billion in WaMu mortgages, as a separate deal with the Federal Housing Finance Agency last month allowed. There the bank gets to foist about a quarter of a $4 billion settlement off on the Feds.

The biggest remaining question is why the DoJ went after the company instead of CEO Jamie Dimon. As critic Bart Naylor, a policy advocate at Public Citizen, noted in an observation made in previous enforcement actions, the settlement hurts shareholders more than the executives responsible. (What happened to the idea enshrined in the Sarbanes-Oxley Act that CEOs and CFOs were legally accountable for a company's actions? Enron's former CFO Andrew Fastow completed a six-year sentence over his role in the energy company's failure last December.)

In any case, as I wrote a while ago at Global Finance, it's the statement of facts in which JPM admits culpability that may be the most significant aspect of its deal with the DoJ (though the department failed to  get the bank to admit to criminal wrongdoing). The bank had tried to shift the blame to Bear Stearns and WaMu by noting that 80 percent of the expected losses on the mortgage securities in question were attributable to those sold by those two banks that it acquired during the financial crisis (with the help, one should remember, of U.S. taxpayers). Whether or not that would have allowed JPM to escape legal responsibility, the DoJ focused instead on those JPM itself sold.

What exactly did JPM do wrong? For one thing, it told investors the securities were up to snuff even though in so doing it ignored its own underwriting standards (and told an employee who complained about it that she shouldn't worry because the bad loans would be spread among a number of bonds). For another, JPM arbitrarily bumped up ratings assigned by third parties who reviewed their quality. Fake documentation sounds like fraud to us.

And that's where JPM is vulnerable to derivative suits by shareholders and other investors. Just how vulnerable, of course, remains to be seen.

Oh, and the settlement has no bearing on the criminal investigation that the DoJ has under way. Maybe Jamie Dimon will find himself on the hook after all.

For more:
- see this DealBook article on the terms of the JPM settlement
- see this DealBook article for a look at the bank's mortgage machinations
- see this Wall Street Journal article for insight into a fateful 2006 meeting