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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

October 28, 2013 at 10:53 AM

The costly story of JPWaMu

“Time wounds all heels,” or so the saying goes. The big news lately has been JPMorgan Chase’s $13 billion settlement with the government, and in the case of the London Whale trading disaster, the Too Big To Fail institution was forced to admit wrongdoing.

In the story during and immediately after the Panic of 2008, the House of Morgan under Jamie Dimon was the one big bank that did things right. No wonder it could acquire Washington Mutual after it failed. But the whale episode, which occurred in 2012 and cost $6 billion, showed that all was not actually well inside the bank.

Now it turns out that even the neat tale of how Dimon was smart enough to avoid the trap of subprime mortgages was untrue.

According to the Wall Street Journal, before the crash JPMorgan “dealt with some of the biggest subprime lenders of the time, including Countrywide Financial Corp., Fremont Investment & Loan and WMC Mortgage, a former unit of General Electric.”

It was bundling subprime loans and selling them as securities, including to Freddie Mac, the government-backed agency that had to be saved with $100 billion in taxpayer money.

Got that? JPMorgan was in on the subprime hustle, too.

This is also more evidence that the subprime bomb that detonated the entire edifice of rackets and hustles in the “financial system” was cooked up in the private sector, not a result of poor brown people getting loans they didn’t deserve. Freddie and Fannie Mae were late to the party. They joined because subprime was so wildly profitable for the big banks and shadow banking system.

In one case, JPMorgan bundled 4,209 subprime mortgages and sold a third of them to Freddie. When the roof fell in, Freddie was left with the losses. The details come from the Federal Housing Finance Agency’s complaint against JPM.

Unfortunately, although the housing agency fined the bank $5.1 billion on Friday, it did not require an admission of wrongdoing. The New York Times reports that the deal even allows JPM to try to recoup $1 billion from the Federal Deposit Insurance Corp. The bank’s net income was more than $21 billion last year.

Which brings us to WaMu. When, among other things, rumors in New York helped stoke a bank run that caused the undeservedly lionized FDIC Chairwoman Sheila Bair to close WaMu and sell its best parts to JPM five years ago, there appeared to be an understanding. The FDIC would “shoulder some liabilities” from bad WaMu. In other words, the subprime toxic waste dump. But the agency has been fighting JPM in court, disputing that.

Two relevant pieces from the NYT story on the latest settlement with the housing agency:

“Nothing in this agreement shall be used as an admission or concession that JPMorgan,” the deal said, “contractually assumed or is otherwise liable for any alleged liabilities or wrongdoing of Washington Mutual Bank.”

And:

Armed with that wording, JPMorgan could file a claim against Washington Mutual’s receivership fund, which is maintained by the FDIC. Such a claim could be for more than $1 billion, given that Washington Mutual accounted for a third of the disputed mortgage securities. It is unclear whether the bank would receive the full amount. The receivership contains about $2.7 billion, according to the FDIC’s Web site. And it already faces other large claims.

So JPM may yet wiggle out of the liabilities from the criminal enterprise that had once been one of Seattle’s most beloved and prudent institutions. Yet, as the housing complaint shows, the big bank’s hands were not so clean even in the run-up to the crash that has impoverished so many Americans. It was doing a Killinger, too.

Today’s Econ Haiku:

At Amazon’s lab

Editors leave, actors come

What sticks to the wall

 

 

 

 

 

Comments | More in Banking | Topics: JPMorgan Chase, Washington Mutual

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