Jamie Dimon’s $13 Billion Secret
TOO BIG TO JAIL?
Very late in JPMorgan’s negotiations with the Justice Department—and despite the department’s agreement not to file the Wagner complaint—it almost became public anyway. In a completely different litigation filed in 2009, the Federal Home Loan Bank of Pittsburgh—one of twelve such banks created by Congress in 1932 to ensure that funding is available for mortgages—initiated a civil lawsuit against JPMorgan’s investment banking division, among other defendants, accusing JPMorgan’s bankers of selling it more than $1.7 billion in shaky mortgage-backed securities. “Pittsburgh FHLB believed that it had made a safe investment,” the bank stated in its amended complaint, but instead it had allegedly suffered some hundreds of millions in losses.
After the news broke in late September that JPMorgan had a deal pending with the Justice Department and the state attorneys general, and after word spread that the threatened filing of Wagner’s complaint had been a catalyst to the breakthrough in negotiations, lawyers for the Pittsburgh FHLB requested that JPMorgan turn over a copy. On October 17, a state judge in Allegheny County agreed and ordered JPMorgan to do so by November 1, or prove that the draft complaint did not exist.
JPMorgan didn’t want to comply with the court’s order, of course, and so it turned to the big guns at the Justice Department to try to quash, or at least delay, the Pittsburgh FHLB’s request. On November 1, Dana Yealy, the general counsel of the Pittsburgh FHLB, got a call from “attorneys with the Department of Justice” who wanted to speak with him “about some recent activity” involving the bank’s litigation against JPMorgan, according to an affidavit he submitted to the court. Yealy and his outside counsel then got on the phone with an unnamed attorney at Justice. “We were instructed we could not reveal the content of the call to anyone,” Yealy later reported. He received another call from Alyssa Kelman, an assistant general counsel at JPMorgan, who said she “understood” that Yealy had agreed to give the bank until November 15 to produce the draft complaint.
On November 14, West called Yealy and requested that he agree to another week’s extension. “He said he was very close to a final deal with JPMorgan, and that after one more week he would not care about the draft complaint,” Yealy recalled.
West also assured him that if he agreed to the new extension, the Justice Department wouldn’t support JPMorgan in its efforts to avoid turning over the draft complaint to the Pittsburgh FHLB. He was happy for the Pittsburgh bank to get whatever settlement it could from JPMorgan, just not at the expense of potentially screwing up the larger deal, especially since Wagner’s complaint—and keeping it out of the public realm—was one of the Justice Department’s main pieces of negotiating leverage with the bank. In an e-mail, DOJ officials acknowledged that JPMorgan’s determination to keep the complaint “from being released provided just enough leverage to help close the deal.” Yealy gave West until November 22.
On November 19, the Justice Department and the state attorneys general announced the $13 billion settlement, including $9 billion in cash to be paid to various federal and state agencies and another $4 billion to consumers “harmed by the unlawful conduct of JPMorgan,” in the form of loan modifications, mortgage principal forgiveness and efforts to reduce urban blight. The Justice Department made the explicit point that fully $2 billion of the $9 billion in cash was directly a result of wrongdoing at JPMorgan, not at Bear Stearns or Washington Mutual.
The Pittsburgh FHLB was not part of the Justice Department’s deal. On November 22, faced with Yealy’s new deadline, Kelman called him again. She asked for another extension before turning over the draft of Wagner’s complaint. This time, Yealy said no. At about 9 pm that night, JPMorgan made a motion to vacate the judge’s October 17 decision. The firm sought to delay any reconsideration of the order to release the draft complaint until January 2014. But the Pittsburgh FHLB fought back and asked for a hearing as soon as possible. “Public policy—the interests of full disclosure and transparency—demands just the opposite of what JPMorgan seeks,” the bank’s attorneys argued. “The circumstances of this motion therefore lead to one obvious question—what is JPMorgan trying to hide?”
Others were wondering the very same thing. Gretchen Morgenson, at the Times, perused the statement of facts that accompanied the settlement and came away unimpressed. “Much of it was the same-old-same-old, a not-very-lively description of a corrupted Wall Street mortgage factory, based largely on some facts that have been in the public domain for years,” she wrote on November 23. “In other words, although it took the Justice Department more than five years to pursue a major bank for its role in the mortgage mania, the investigation seems to have unearthed material that, by and large, could have been dug up with a spoon.”
JPMorgan argued to Judge R. Stanton Wettick Jr. that, in the wake of the $13 billion settlement, the draft complaint should not be turned over to the Pittsburgh FHLB. The Justice Department had provided JPMorgan with the document as a “confidential settlement communication,” the bank argued, and it should not be shared with the folks in Pittsburgh. Judge Wettick disagreed. He gave JPMorgan until December 17 to turn over the Wagner complaint. This time, the bank complied with the judge’s order. But still deeply concerned that the contents of the document would be made public by the Pittsburgh FHLB or its attorneys, JPMorgan quickly entered into settlement negotiations.
On January 3, JPMorgan Chase reached a confidential settlement with the Pittsburgh FHLB. One of the terms of the agreement was that the Wagner complaint would never see the light of day.
Read Next: In the April 11, 2011, issue, William Greider described how over the past decade the Justice Department has gone soft on corporate crime.