Jamie Dimon’s $13 Billion Secret
In the end, the abject fear of Ben Wagner got Jamie Dimon to cave.
For much of 2013, Dimon, the chairman and chief executive of the formidable JPMorgan Chase & Company, was telling anyone who would listen that it was unfair and unjust for federal and state prosecutors to blame him and his bank for the manufacture and sale of mortgage-backed securities that occurred at Bear Stearns & Company and at Washington Mutual in the years leading up to the financial crisis. When JPMorgan Chase bought those two failing firms in 2008, Dimon argued, he was just doing what Ben Bernanke, Hank Paulson and Timothy Geithner had asked him to do. Why should his bank be held financially accountable for the bad behavior at Bear and WaMu?
It was a clever argument—and wrong. Dimon’s relentless effort to spin his patriotic story soon collided with the fact that Wagner, the US Attorney for the Eastern District of California, had uncovered evidence that JPMorgan itself was guilty of many of the same greedy and irresponsible behaviors. Piles of subpoenaed documents and e-mails revealed that JPMorgan bankers and traders had underwritten billions of dollars’ worth of questionable mortgage-backed securities that Dimon had been telling everyone had originated at Bear Stearns and WaMu. Worse, the bad behavior had occurred on Dimon’s watch.
The likelihood that the Justice Department would file Wagner’s civil complaint last fall—exposing publicly for the first time the litany of wrongdoing at JPMorgan and threatening to push it off the perch that Dimon had so artfully constructed for it over the years—ultimately brought Dimon to the table. On September 26, just weeks after the Justice Department shared a draft copy of Wagner’s complaint with Dimon, the two sides arranged for a summit meeting between Dimon and Attorney General Eric Holder. By mid-November, the bank had agreed to pay $13 billion in a comprehensive settlement of mortgage-related securities claims with various branches of the federal government and a group of states, led by the attorneys general of New York, California, Illinois, Massachusetts and Delaware.
It was the largest financial settlement of all time, and it kept Wagner’s complaint away from the prying eyes of the public. One thing is clear: Dimon’s claim that his own bankers and traders had done nothing wrong in the years leading up to the financial crisis wasn’t true. “The investigators and the lawyers were uncovering very viable evidence,” explains Associate Attorney General Tony West, who headed up the settlement negotiations on behalf of the Justice Department. “I think there was recognition that we had enough evidence there that would support the complaint and would support a robust lawsuit.”
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Although Wagner’s complaint remains unfiled—and, so far, unobtainable—tantalizing hints of what it contains are available in a sanitized “statement of facts” that was a required component of the settlement. Unlike the complaint, the statement of facts doesn’t include names and offers few specifics, but there is no mistaking the wrongdoing. Among the documents Wagner uncovered was one in which an unnamed JPMorgan employee, who had been involved in purchasing pools of mortgages from third parties, warned two senior executives that “due to their poor quality, the loans should not be purchased and should not be securitized.” She expressed her concerns in a letter to a managing director at the bank, who shared it with other managing directors. “JPMorgan nonetheless securitized many of the loans. None of this was disclosed to investors,” Dimon conceded in the settlement agreement. [A disclosure of my own: after JPMorgan Chase fired me as a managing director in January 2004, I brought—and lost—a wrongful-dismissal arbitration against the bank. Separately, I remain in litigation with the bank as the result of a soured investment I made in 1999.]
In another instance, Wagner found that JPMorgan’s bankers had decided to eliminate a bunch of low-quality “stated income” loans—mortgages that had been granted without documented proof of the borrower’s income—from a pool of mortgages they were going to buy and securitize. When the originator of the mortgages objected to JPMorgan’s decision to remove these loans from the pool, a group of JPMorgan managing directors—including bankers, traders and salesmen—met with the originator and decided to buy two of the loan pools anyway, including those with the squirrelly mortgages. JPMorgan then proceeded to bundle “hundreds of millions of dollars of loans from those pools into one security.” Wagner found that between the start of 2006 and the middle of 2007—when the mortgage securitization frenzy was at its peak—JPMorgan packaged and sold securities containing thousands of mortgages that were rated by a third-party evaluator to be of extremely low quality, meeting few, if any, of the bank’s underwriting standards.
“Nobody would stand up and say Chase qua Chase—just Chase alone—didn’t do things wrong,” explains one person familiar with the facts. “There clearly is some liability.” Reflecting on the details contained in Wagner’s complaint that were left out of the statement of facts, West says that the statement “may not have all the bells and whistles that you would have in a complaint, but I feel confident that we were able to craft a statement of facts which lays out the concept that this thing was illegal and created liability. So from that standpoint, I think the public knows that JPMorgan engaged in activity that we considered to be fraud.”
The magnitude of the settlement, and the likelihood that it would create a template for other settlements with the big Wall Street firms, had government officials crowing. “Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Holder said at the time the settlement was announced. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior.”
Dimon was more circumspect. In a conference call the day the settlement was announced, he mostly kept quiet while Marianne Lake, the firm’s CFO, led financial analysts through the details, including how $7 billion of the $13 billion fine would be tax-deductible. Occasionally, Dimon interjected a clarifying comment. At one point Mike Mayo, a longtime Wall Street research analyst, asked Dimon the question on everybody’s mind, especially in light of Dimon’s aggressive efforts to shape the narrative: “How is it that JPMorgan got front and center with this issue? That it’s the Department of Justice working out an agreement with JPMorgan when JPMorgan performed so well during the crisis, yet here’s the one bank that’s paying a $13 billion fine?”
Without missing a beat, Dimon replied: “Mike, you’ve got to ask them, OK?” But there’s no question the pugilistic Dimon was plenty peeved. At the Microsoft CEO Summit in May, he reportedly told a crowd of executives that he “had to control his rage” about the settlement.
This, then, is the story of what happens when a hubristic CEO—often described as the reigning king of Wall Street—is confronted by a narrative he thinks he can control but ultimately cannot. It’s the tale of Jamie Dimon’s agenda and how it got derailed. But it is also the story of how the Justice Department has decided to handle the outrageous behavior of all the big Wall Street banks in the years leading up to the financial crisis. Unfortunately, it shows just how far the government is willing to go to avoid naming names, as well as to keep especially revelatory evidence of wrongdoing out of the hands of the American people. (Somehow, this is the new normal.)
Needless to say, there are many people eager to claim a large dollop of credit for bringing Dimon and JPMorgan to heel, and nary a soul at the bank willing to explain how or why it happened in the first place. Indeed, Dimon declined to be interviewed for this account, and the firm refused to allow anyone else at JPMorgan to comment. Why bother answering questions when your board responds to the $13 billion settlement by giving you a raise in compensation—to $20 million—for getting it done?
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