JPMorgan has agreed to pay $13 billion to settle allegations surrounding its role in selling bad mortgage-backed securities in the run-up to the 2008 financial crisis. It is the largest single settlement ever paid by a bank.
The fine has made a significant impact. It represents a huge chunk of JPMorgan’s assets. In agreeing to pay the fine, JPMorgan took ownership for its role in the crisis and personally apologized to investors for their involvement in the deal and have agreed to rigorous oversight by federal regulators to prevent such an occurrence from ever happening again.
Just kidding. Oh my God, I totally almost got through that with a straight face.
In truth, the fine really does not mean that much to JPMorgan. While it is a significant amount of money that the banking giant must pay, it is a paltry sum in the long run, simply a part of the cost of doing business.
JPMorgan has assets valued at more than $2.4 trillion, so the fine represents about 1/1800 of the company’s total value. USA Today reports that the company is projected to recover quickly from the loss: “The $13 billion settlement almost exactly matches the company’s net profit for the first two quarters of 2013.”
JPMorgan has been increasingly eager to move beyond its legal woes. It currently faces more than a dozen other investigations into its practices in the lead-up to the banking crisis. In agreeing to pay a huge fine, it made clear it is more than willing to spend money in order to make its legal problems go away.
Many of the active investigations that JPMorgan currently faces are looking into the conduct of Bear Stearns and Washington Mutual, two companies acquired by JPMorgan during the banking crisis for the bargain basement price of about $3.4 billion. As part of the acquisition back in 2008, JPMorgan agreed to take on responsibility for their legal woes. In exchange, it became the largest bank — in terms of revenue — in the world.
Before the crisis and acquisition of the two companies, JPMorgan earned about $70 billion in annualized profit. Today it earns about $100 billion in annualized profit. Even with the huge fine it has agreed to pay, along with the headache of the legal woes it still faces, the acquisitions of Bear Stearns and Washington Mutual were spectacularly smart investments on the part of JPMorgan. It can be argued that they have more than paid for themselves in a short amount of time and will continue to pay dividends for years to come.
Perhaps most tellingly of the fine’s impact on JPMorgan’s bottom line is the news that the fine has not significantly impacted JPMorgan’s stock price. Wall Street seems unfazed, and JPMorgan said long ago that it had already set aside a total of $23 billion in reserve to deal with legal fees and fines stemming from the banking crisis. The company did a good job of getting in front of the story, stymieing the sticker shock of the $13 billion it has agreed to pay out.
JPMorgan profited handsomely from the financial crisis. According to The Motley Fool, if we look back to a time before the crisis, “The company’s book value per share jumped from $36.7 billion in 2007 to $52.5 billion today.” It stands to reason that the company knew it was not done paying for Bear Stearns or Washington Mutual after the acquisition occurred.
Five years after the bubble burst, no single banker on Wall Street has gone to jail for any crimes related to the banking crisis, but the federal government is conducting a criminal investigation that may soon change all that. The Wall Street Journal reports that as part of the settlement agreement between the banking giant and the federal government, JPMorgan’s CEO, Jamie Dimon, repeatedly asked that the criminal investigation be dropped.
He eventually caved in to that demand. There is no provision in the settlement that dismisses any criminal activity. Attorney General Eric Holder has insisted payment of the fines levied against JPMorgan will have no bearing on the outcome of the criminal investigation.