JP Morgan will do fine, and no one will be blamed
November 17, 2013
JP Morgan-Chase, the nation's biggest bank, finds itself in the news once again. The bank just agreed to pay $5.1 billion to the Federal Government for bad mortgages sold to Fannie Mae and Freddie Mac. The feds say JP knew they were bad, but sold them anyway.
But wait, there's more: The institution is still negotiating with the government over another $9 billion in claims relating to the sale of mortgage bonds.
And there's still more: JP Morgan is facing claims from some nine big mortgage bond holders over losses in those instruments.
That's $20 billion (I ran out of fingers and had to take off my shoes to reach that total).
This is such a staggering number that it prompts at least three questions in the minds of a lot of us.
How could this happen in the first place? How can the bank sustain such staggering losses? And, finally, what individuals have been brought to account for perpetrating the whole mess in the first place?
I've written about the cause of the event before in this column, but it might be appropriate to encapsulate the story one more time.
Investors worldwide wanted places to put their money. The appetite was fueled by tons of excess cash coming out of the booming economies of China, Russia, Brazil and India, and not enough places to put it. The U.S. was perceived as the best place to invest, if the yield was high enough. Housing, possibly the major business sector in America had the potential to supply safe, high yielding instruments through mortgage-backed securities.
Investors, including sovereign funds, got a taste of the product, and they loved it. It didn't take long to realize that there would be an incredible amount of money to be made in satisfying the craving.
The problem was, we started to run out of mortgages. So more product had to be created, which was done by virtually handing out money to whomever owned a house. Boy, was it fun while it lasted. Everybody hopped on the gravy train, from borrowers to bankers to brokers to government agencies.
In the process, all concerned figured they could pass on the risk to somebody else. Borrowers could say, "I'm a fool for taking out a big loan, which I probably can't pay back, on this house, but I'll find a greater fool to buy it for a lot more money." Mortgage originators, banks and mortgage companies sold the loans to investors like Fannie Mae and figured, let Fannie worry about it. The Fannies and Freddies and JP's put the loans into mortgage backed securities and said, "Hey, let the investors take the hit; they want these things so bad, we'll just accommodate them."
But it was like pumping sewage out of a sub-basement apartment. If the line gets clogged, sewage runs downhill. And the line got clogged very quickly: An astounding number of borrowers didn't even make the first payment on their mortgages.
How can JP Morgan-Chase take a $15 billion to $20 billion hit? First, the bank is enormous, with earning assets that generate massives each day. Like mold, it just sits there and grows. This is one of the upsides of being "too big to fail."
But at the end of the day, it's the U.S. economy that will make the difference between a pothole and a minor speed bump on the bank's road to bigger profits and further growth. Ultimately, through deposits and the inevitable circle of the movement of money, a good chunk of those billions will find their way back to JP. The American economic strength will continue to do what, so far, it's always done: cover American economic mistakes.
So….What? The third question? Who has been called to account?
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He'll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.