I find this offensive. Last year, JPMorgan Chase made a deal with the Justice Department to pay the largest fine in history, $13 billion, blah, blah, blah. But the big deal is not the fine, because, hell, it’s JPMorgan Chase; the company still made $18 billion that year. I think a major bank robber would be fine with a deal that only required him to pay 40% of the money he made that year. In fact, most regular felons have to pay a lot more than that in restitution. The money means nothing. But here’s the important part: according to the Washington Post, “The Justice Department and JPMorgan are hammering out the final details, including a statement listing what the company did wrong.” Consider our poor bank robber again. Can you imagine what a terrible thing it would be to be forced to admit his guilt?! I mean, the 30 years in jail is nothing compared to that! Of course, JPMorgan might also be open to further legal proceedings — focus on the “might” as in “won’t.” I mean, it’s been a year. Have you read about any indictments?
That was then. On Thursday, Matt Taibbi published a bombshell article, The $9 Billion Witness: Meet JPMorgan Chase’s Worst Nightmare. It is about Alayne Fleischmann, a securities lawyer who used to work for JPMorgan Chase. And she tells the inside story of last year’s settlement. In brief: managers at the bank not only knew about the criminal behavior that was going on, they were the ones pushing it.
Fleischmann worked under the manager for diligence who did not want any of his subordinates to send him email. He wanted everything done verbally, we assume because he didn’t want a paper trail that would lead to him after the bad securities the bank was approving blew up. Fleischmann and other subordinates did not approve many of the mortgages that were in the securities. This meant the securities could not be sold. So the subordinates were put under extreme pressure to okay bad loans.
What I find most interesting about this is that the situation is that the low-level employees like Fleischmann are the ones being set up for the fall. When the securities were shown to be the garbage everyone at JPMorgan Chase knew they were, the managers could feel safe with their bonuses knowing they could always claim that they were the victims of their subordinates who approved bad loans. It is despicable.
Fleischmann stands to lose her license and much more for coming forward because of a confidentiality agreement she signed. And it would be entirely typical of American “justice” that she gets punished while the actual criminals do not. And the criminals are everywhere, even at the very top of JPMorgan Chase:
[I]n early 2007, she sent a long letter to another managing director, William Buell. In the letter, she warned Buell of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase’s diligence process.
Fleischmann assumed this letter… would be enough to force the bank to stop selling the bad loans. “It used to be if you wrote a memo, they had to stop, because now there’s proof that they knew what they were doing,” she says. “But when the Justice Department doesn’t do anything, that stops being a deterrent. I just didn’t know that at the time.”
In February 2008, less than two years after joining the bank, Fleischmann was quietly dismissed in a round of layoffs. A few months later, proof would appear that her bosses knew all along that the boom-era mortgage market was rotten. That September, as the market was crashing, Dimon boasted in a ball-washing Fortune article titled “Jamie Dimon’s SWAT Team” that he knew well before the meltdown that the subprime market was toast. “We concluded that underwriting standards were deteriorating across the industry.” The story tells of Dimon ordering Boester’s boss, William King, to dump the bank’s subprime holdings in October 2006. “Billy,” Dimon says, “we need to sell a lot of our positions… This stuff could go up in smoke!”
In other words, two full months before the bank rammed through the dirty GreenPoint deal over Fleischmann’s objections, Chase’s CEO was aware that loans like this were too dangerous for Chase itself to own.
Why isn’t Dimon doing years in jail? Because that sort of thing just isn’t done to the likes of him. If he were ripping people off for five bucks by doing three-card monte in the subway, he’d be in jail. But defrauding people out of hundreds of millions of dollars somehow makes a man respectable.
So five years pass and the Justice Department contacts Fleischmann and gets all the goods on JPMorgan Chase. They are going to announce a widespread fraud case against the bank. But then Dimon calls the number three man at Justice and tells him the bank wants to negotiate. So the fraud case is dropped and JPMorgan pays a few billion and admits, “Yeah, some unnamed people misbehaved.” As Dennis Kelleher of Better Markets said, “It would be like charging a serial murderer with a single assault and giving them probation.”
And in the end, that $13 billion figure was a joke anyway:
The deal was widely considered a good one for both sides, but Chase emerged with barely a scratch. First, the ludicrously nonspecific language surrounding the settlement put you, me and every other American taxpayer on the hook for roughly a quarter of Chase’s check. Because most of the settlement monies were specifically not called fines or penalties, Chase was allowed to treat some $7 billion of the settlement as a tax write-off.
Couple this with the fact that the bank’s share price soared six percent on news of the settlement, adding more than $12 billion in value to shareholders, and one could argue Chase actually made money from the deal. What’s more, to defray the cost of this and other fines, Chase last year laid off 7,500 lower-level employees. Meanwhile, per-employee compensation for everyone else rose four percent, to $122,653. But no one made out better than Dimon. The board awarded a 74 percent raise to the man who oversaw the biggest regulatory penalty ever, upping his compensation package to about $20 million.
As for the criminal investigation, well, the Justice Department apparently just dropped it. Fleischmann was not contacted for almost a year. She is understandably skeptical now. Consider what Eric Holder said about holding bank managers accountable, “Responsibility remains so diffuse, and top executives so insulated that any misconduct could again be considered more a symptom of the institution’s culture than a result of the willful actions of any single individual.” As Taibbi commented, “In other words, people don’t commit crimes, corporate culture commits crimes!” In a regular criminal case you would never see this. After a criminal was looking at decades in jail, then the defense could make social pleas. But when it comes to corporate crime and billions of dollars the Justice Department starts there, “They aren’t bad guys!”
As for Fleischmann, it will probably go very badly. If she doesn’t lose her license altogether, she will be blackballed. I’m sure the financial press will pick her life to death. But that’s what happens to ethical people in our society. Other than that, expect JPMorgan Chase to make even more money and for Jamie Dimon to get another raise.
Check out the great Democracy Now! interview with both Taibbi and Fleischmann.