New Bank Investigations: Real Action, or More of the Same?
A lot of interesting things happening on the white-collar enforcement front. Evil hedge fund SAC Capital and its villainous ruler Stevie Cohen were run through the gauntlet, Goldman Sachs patsy Fabulous Fab took a beating in civil court (I love the detail that emerged, that Goldman executives now call him “the poor kid“), and now, apparently, a pair of high-profile investigations have been launched against Bank of America and J.P. Morgan Chase for subprime mortgage fraud. The latter investigations seem to be designed to answer criticisms that nobody is going after the real doers of evil systemic crimes.
The Chase case apparently involves a criminal investigation, which is indeed interesting. The company admitted as much yesterday, saying federal investigators out West have “preliminarily concluded” that Chase brazenly violated securities laws when it sold subprime mortgage-backed instruments in 2005-2007.
But I’m skeptical it will turn into a real criminal investigation. All of the stories that broke in the last day or two noted the same detail, that Chase has beefed up its estimates for litigation/settlement costs:
As the investigations drag on, the bank is racking up significant legal costs. To help cushion against potentially hefty payouts to the authorities, JPMorgan recorded a $678 million expense for additional litigation reserves in the second quarter, up from $323 million in the same period a year ago, according to the filing on Wednesday.
The bank also estimated it could incur up to $6.8 billion in losses beyond its reserves, nearly $1 billion more than the first quarter of the year.
The government may very well decide to go after Chase in what it considers a big way. It may do the same for Bank of America, and then it may keep going on down the line to other banks, until it has collected a billion dollars or so from all the usual suspects, who were virtually all engaged in the same kinds of schemes, gathering and selling to customers radioactive mortgage bonds they knew were likely to explode, or were ridden with fraud and faulty underwriting.
But to me, these investigations will be meaningless unless one of two things happens, once they reach the inevitable stage of concluding painstakingly-crafted settlements with the inevitable teams of high-priced lawyers for the offending firms:
1) Someone goes to jail.
2) The company is ordered to break itself up into smaller pieces.