Much has been made of the remarks from JPMorgan Chase (NYSE: JPM ) CEO Jamie Dimon on why he thinks the settlement his company has faced is "unfair." However, the reality remains he is both right and wrong to make that claim.
In a recent interview with Andrew Ross Sorkin of CNBC, when Sorkin asked Dimon in regard to the settlement, "Do you think, ultimately, that it was fair?" he responded bluntly: "No, I think a lot of it was unfair. But I'm not going to go into details."
However, to truly understand why Dimon thought it was "unfair," he needs to go into more detail, as otherwise he presented a rather questionable argument.
Dimon continued the discussion surrounding the $13 billion settlement by saying:
A lot of those problems were '08 and prior. If you talk about mortgages, 80% of them were at Bear Stearns and [Washington Mutual]. There is no one at this company who is responsible for that 80%. And I would say we shouldn't have paid for that 80%, but that's neither here nor there.
He elaborates that issues in the litigation were built up over time -- from 1990 to 2008 -- and that as a result, JPMorgan Chase had nothing to do with those actions with which it has been forced to settle.
But the question here becomes: What is Dimon truly saying? If he is asserting that JPMorgan Chase shouldn't be held responsible for the actions simply because they occurred in the past and at the hands of different people, that would be setting an alarming precedent.
A frightening example
Consider if a company knew that if it were to be acquired, all of its past misgivings would be essentially nullified. It would give the company incentive to engage in risky and reckless behavior with the hopes of boosting short-term profits to make it a more desired acquisition candidate. In the example of a bank, it could issue loans that were remarkably risky over the life of the loan but from the outset appear profitable and safe.
Executives and owners would likely turn a blind eye to such things, especially if they knew they wouldn't be held liable for those things in the event they were acquired, and were compensated by short-term performance. A company could set out on a two-year plan to present astronomical returns in the short term to facilitate an acquisition, and all the executives would walk away with massive checks. Ultimately, the only people hurt in the deal would be the company saddled with the soaring loans.
Put simply, while it may seem "unfair" that JPMorgan Chase is paying for the actions of those at Bear Stearns and Washington Mutual, if it was not held responsible, it could create a disastrous precedent to give companies incentive to act in a way detrimental to everyone.
In defense of Dimon
However, if Dimon is not asserting that JPMorgan Chase shouldn't be held responsible simply because the events happened in the past at other firms, but instead because the federal government helped facilitate the acquisitions of the two troubled lenders, he simply needs to say so.
While it isn't known what was said behind closed doors, the Federal Reserve did provide "special financing" when the acquisition of Bear Stearns was announced. When discussing the settlement in November, Dimon noted of the Bear Stearns acquisition, "We did it because we were asked to, and we had never expected this kind of stuff to happen." And while he said that the Washington Mutual acquisition was made with "our eyes open," the bank was asked to give up some of the protective claims it negotiated with the FDIC.
If JPMorgan Chase was "forced" or even just strongly guided into making the acquisitions for which it is being penalized -- and if it would not have undertaken them otherwise -- then Dimon is right in asserting that it's "unfair" to face penalties. However, if he is saying only the bank shouldn't be punished because the actions occurred in the past at the hands of those not currently at his firm, he is mistaken.
Jamie Dimon is undoubtedly one of the craftiest CEOs in both banking and in American business, but when making assertions like the one he has, he must give more details.
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