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.]