Investment Contrarians

Why You Should Be Mad at the Latest JPMorgan Lawsuit

By for Investment Contrarians |

Why You Should Be Mad at the Latest JPMorgan LawsuitWe all know that politicians are willing to do anything to get into the limelight, gain favor among the citizens, and then use this leverage for their own gain. The latest lawsuit against JPMorgan Chase & Co. (NYSE/JPM) is so stupid and ridiculous that it would be funny if it weren’t going to cost taxpayers millions of dollars to pay for all of the lawyers involved.

To begin with, we all know that for an attorney general to move up the rungs of the political ladder, to Governor for example, they need a high-profile case to catch the public attention. With bank stocks being Public Enemy Number One, New York Attorney General Eric Schneiderman has decided to use the public’s anger against bank stocks to his favor. The New York Attorney General’s office has just filed a civil lawsuit against The Bear Stearns Companies, Inc., now a unit of JPMorgan, for alleged fraud.

When bank stocks were in the middle of the financial crisis several years ago, market sentiment for the group was extremely poor. No one was willing to lend or help out other bank stocks with such a negative market sentiment. The federal government essentially forced JPMorgan to take over Bear Stearns. Initially JPMorgan balked, stating that it didn’t have enough time to conduct due diligence. The federal government essentially said, “Don’t worry; we’ll cover you.”

Now that the political tide on bank stocks has shifted with market sentiment, the bull’s-eye is on the back of JPMorgan, among other bank stocks. Obviously, this is a lesson: if you are a business leader, you can never trust the word of the government. As market sentiment shifts, so too will the support of the government.

JPMorgan stepped in to help prevent a collapse of the U.S. financial system, and what they get in return is a lawsuit over an entity that they had nothing to do with. These alleged crimes were for actions that took place before JPMorgan took over Bear Stearns. I should know better, but I am still surprised that politicians will do anything once the market sentiment shifts to gain favor among potential voters.

This is nothing but an attention-grabbing shot at bank stocks by an Attorney General who wants publicity. And he is missing the point. I am all in favor of punishing illegal behavior, but why is he launching this attack against bank stocks and not against the individuals who perpetrated the fraud? Even if he is successful, no one will go to jail; the bank stocks will simply pay a fine and the Attorney General will have a “win” to sell to the public when he runs for governor as a politician who “cleaned up Wall Street”—it’s a joke.

I suggest that criminal actions be punished on an individual level. If you were forced to commit a crime while working for one of the bank stocks and you knew that you wouldn’t go to jail but the company would simply pay a fine, you wouldn’t care that much. But, if you knew you could go to jail for 10 years, I’m sure more people would speak up and refuse to conduct illegal actions.

Let’s stop these ridiculous headline-grabbing actions against the bank stocks and start prosecuting individuals that commit crimes. If bank stocks employ hundreds of thousands of people, not all of them are committing fraud. Let’s target the specific criminals. How many senior executives at bank stocks would encourage illegal behavior if they knew that the lower-level person could testify against higher-level employees and put them in jail for over a decade?

I would suggest that the incentive structure would dramatically shift and there would be a massive inclination to conduct business properly. Bank stocks aren’t the problem; the incentive structure is the true culprit.

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  • Frank Lipsky

    Sasha : You state When bank stocks were in the middle of the financial crisis several years ago, market sentiment for the group was extremely poor. No one was willing to lend or help out other bank stocks with such a negative market sentiment. The federal government essentially forced JPMorgan to take over Bear Stearns. Initially JPMorgan balked, stating that it didn’t have enough time to conduct due diligence. The federal government essentially said, “Don’t worry; we’ll cover you.”
    Platitudes such as "the federal government essentially said, “Don’t worry; we’ll cover you.” are trite and misleading and are the equivalent LLOYD Blankfine stating his Booard of Directors forced him to accept huge bonuses

  • D. S. Fyffe

    This viewpoint appears severely myopic on several levels.

    Wow.. poor JP Morgan… so altruistic to step in and "allow" themselves to be forced to take over Bear Stearns. c'mon? really? This part you know but choose to whitewash; The systemic risk involved made it entirely in Chase's best interest to absorb to shock of a Bear Stearns implosion. Nobody "made" them do it. They just got the short straw. Either Stearns or Merrill. And because they have been so sheltered heretofore, all while being very complicit in the degeneration and collapse of the market, negates any plea of innocence in my book. However the lawsuit seems to be directed at that subsidiary and its asset, not the company as a whole.

    And while market sentiment and public sentiment are deeply intertwined, in the real world there is serious difference between the two. You may call this an attention grabbing scheme but Schneiderman serves at the discretion of the public that elected him… and that electorate is ground zero in its outrage and its demand for accountability. The more vocal of which started a movement that spread worldwide and made the market extremely nervous for many months. If Schneiderman does what's being demanded of him and it propels him into the governorship… so be it. That's simply the reward from the constituency for doing the work they demanded of him when they shut down bridges and big chunks of his city.

    You went on to give reasons for a strange bottom up approach to corporate accountability. What company does that?? Corporate culture is set from the top down. Ceo's down to VP's to directors to managers to supervisors to sales. Not the other way around. What does sales have to do with CDO's and bundling securities? All they do is sell. Why should they be criminally liable for the decisions from the floors in the clouds.

    The problem is that the math works out for the decision makers. The company gets to make say.. 300 billion from these deals before anybody realizes and their fine may be 20… which they'll probably pay with bailout funds at almost zero interest. Unless they are properly regulated and those regs enforced… we are always at risk as longs as the math works.

    It is safe to say that this was my first and now last time visiting this site. If you can be so way off in these overall viewpoints, how can I expect there to be objectivity in your judgement with investment advice?

  • S. Fazio

    I'm really supposed to feel that JP Morgan has in any way been victimized here? That's rich.

  • Doubting_Thomas12

    Agreed. I'm actually a fan of JP Morgan, seeing as how they stayed mostly clean before the crisis. But their Bear Stearns investment was almost as poor an investment as BofA's Countywide firesale. Only later they found out that guess what?! They bought a barrel of liabilities, very few assets to be found.

  • Gene Girard

    You engage in gross oversimplification my friend. Ordinarily, you cannot underestimate the short attention span of the American people. That has not occurred, according to your analysis, with respect to the 2008 financial crisis which, BTW, clearly began in 2006 and 7.

    People are so angry because no one was held accountable in the first instance. And there was plenty of blame to go around all the way from the ratings agencies that made 75% of their profits in 2007 from rating CDF portfolios to the commercial banks and virtually the entire "real estate" industry.

    Nobody did the perp walk. So the anger continues to simmer.