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Real money: the $13 Billion Settlement with J.P. Morgan

Well this certainly is real money, but what is next?

The U.S. Department of Justice just announced a $13 Billion Settlement with J.P. Morgan to settle allegations of securities violations regarding the sale of mortgage backed securities.

You remember how all this started, right? About the time John McCain and Barack Obama were just two U.S. Senators fighting for the big job, the entire economy tanked. Despite the advice of just about every financial analyst for the previous 5 years, it turned out that housing prices could actually go down.

Then it turned out that in addition to selling mortgages and making money on those (which were backed by taxpayer supported insurance in many instances) the banking world was busy selling securities based on bundles of mortgages. After that, the details as to what got sold to whom and what is actionable gets fuzzy. However, the Department of Justice says:

“As part of the settlement, JPMorgan acknowledged it made serious misrepresentations to the public – including the investing public – about numerous RMBS transactions.”

Usually when you pay a lot of money (and I think we can agree that $13 billion does qualify as a lot of money) you do not have to acknowledge anything at all. Here they have to pay the money and acknowledge “misrepresentations.” This settlement takes care of the civil liability with the federal and state governments regarding the sale of such securities prior to Jan 1, 2009 for J.P. Morgan, as well the banks it bought, Bear Stearns and Washington Mutual. But even though the bank was forced to fork over “big money,” the Department of Justice also did not release the bank from potential criminal prosecution.

To me all this is a strong indication that there is more, much more, to come with regard to major financial prosecutions by the Justice Department. Indeed this huge settlement reflects what the New York Times calls a strategy shift in prosecution:

“The magnitude of the payout reflects a broader strategy shift within the Justice Department to hit Wall Street where it hurts most: the bottom line. Once content to extract multimillion-dollar fines that critics dismissed as little more than a slap on the wrist, prosecutors have signaled to the nation’s biggest banks that the billion-dollar mark is a floor rather than a ceiling.”

The Department of Justice and the state Attorneys General know there is money in these prosecutions. J.P. Morgan was not the only bank doing business in mortgage backed securities back in the days of the financial collapse. It stands to reason we will be hearing more about other banks over the course of the next few months.

More importantly, the Times is probably right in the sense that government officials now understand it makes sense to pursue major cases involving allegations of financial wrongdoing. There are now more ways than ever for the government to get the key information needed to build such cases. I’m hopeful that if and when such fraud is being conducted there are also people around who know they can report the fraud.

The Dodd-Frank Legislation created a new S.E.C. whistleblower office, which provides an opportunity for financial whistleblowers to report violations of securities law anonymously to the S.E.C. Whistleblowers may even earn a reward for such reports. Many states which have an interest in these kinds of cases because their pension funds buy securities, also have their own False Claims Act laws. Those state laws provide another avenue for whistleblowers to pursue securities fraud.

So, there are new and greater sources of information available to government investigators, stronger laws to reward whistleblowers, and a more aggressive government posture towards financial “misrepresentations.” This case settled the civil liability regarding mortgage backed securities for a very big bank, up to Jan 1, 2009. It is now close to 2014 and there are a lot of other financial institutions and a lot of other kinds of securities.

There is more to come.