Is the SEC’s Record-Breaking Fine Really a Victory for the Agency?

Although Wall Street’s major players are no strangers to confrontations with the SEC, this year was a landmark year for agency fines.  The hardest hit was JPMorgan Chase who recently settled several mortgage-related claims for a record-breaking 13 billion dollars, over half of the company’s yearly profits.  This massive fine came swiftly on the heels of other billion dollar fines, bringing 2013’s grand total to nearly 23 billion dollars.  The current settlement of 13 billion includes 9 billion in federal and state civil settlement claims as well as a 4 billion dollar relief package for consumers harmed by JPMorgan.  This settlement stems from the well-known residential mortgage backed securities and subprime mortgage loans scandal which contributed to the 2008 financial crisis.  Although CEO Jamie Dimon insists that the settlement does not mean that JPMorgan admits to any wrongdoing, the statement of facts released by the Department of Justice includes an admission by the banking titan that it marketed the securities and loans knowing that they did not meet SEC guidelines and were unfit for sale.

The claims by the SEC are based on JPMorgan’s misrepresentations to investors regarding the purchase of loans for mortgage-backed securities.  JPMorgan salesmen marketed securities to potential investors based partially on their due diligence procedures.  In order to ensure unbiased assessments of potential loans, JPMorgan contracted third-party due diligence vendors to rate whether the loans complied with underwriting guidelines and were suitable for investments.  However, JPMorgan managers had final say over the loan pools and had the power to override the contractors’ determinations of “reject” loans.  They exercised this authority with about 50 percent of the unsuitable loans, which were eventually included in the packages sold to investors.  When these reject loans failed, the value of the securities plummeted, causing significant harm to investors.

The massive settlement has far from crippled the banking giant or the bankers themselves.  Most of the major players who oversaw the divisions of JPMorgan responsible for the loans now have comparable jobs with other banks, have retained their positions within JPMorgan, or have even received promotions.  The company isn’t feeling the sting of the SEC’s attack either, as the soaring stock price after the announced settlement has nearly made up the entirety of the fine.  When settlement negotiations with the SEC were announced in late October, stock prices fell to $52 per share.  After the final agreement was announced, however, share prices jumped to $58.25 per share at the time of this writing.  This price increase meant an additional $12 billion in market value for the bank.  Additionally, JPMorgan won’t be bearing the full burden of the fine:  taxpayers will be helping with up to $7 billion, which is tax deductible for the firm.  The record-setting fine may represent the SEC trying to flex its muscles by letting the country’s largest banks know that wrongdoings of this scale will not be overlooked, but it also shows that even fines of this magnitude may not be enough to deter banks from similar behavior.

Posted Feb. 8, 2014