Jamie Dimon, the chairman and CEO of JPMorgan Case (NYSE:JPM), is mad at the U.S. government. And he's threatening to exact revenge.
During the past 150 years, JPMorgan has supported the federal government in almost every financial crisis since the Civil War -- the Panic of 1873 being one of the few notable exceptions.
- During the Panic of 1893, JPMorgan led a syndicate of bankers that allowed the government to avoid devaluing the U.S. dollar.
- In the Panic of 1907, JPMorgan organized the bailout of multiple trust companies and a leading brokerage house, saved New York City from insolvency, and rescued the New York Stock Exchange.
- When Continental Illinois, the nation's first too-big-to-fail bank, was on the brink of illiquidity in 1984, JPMorgan played a central role in allowing it to head-off bankruptcy.
- JPMorgan was there to help pick up the pieces following the 1998 failure of Long-Term Capital Management.
- And in the latest crisis, the nation's biggest bank by assets rescued not one, but two, major financial firms, Bear Stearns and Washington Mutual, at the explicit behest of the U.S. government.
Despite all of these things, JPMorgan has found itself squarely within the crosshairs of the federal and state governments.
It was fined more than a billion dollars for the 2012 trading debacle known as the London Whale. It's been, or is in the process of being, sanctioned by authorities for manipulating interest rates, foreign exchange rates, and energy markets. And, accounting for the lion's share of monetary and reputational damage, JPMorgan has amassed close to $19 billion worth of legal costs stemming from the meltdown of the subprime mortgage market.
This is unnerving from Dimon's perspective, because "virtually 70%" of the largest source of costs -- mortgage litigation -- was inherited from Bear Stearns and Washington Mutual. On top of this, when JPMorgan acquired these firms as they gasped for breath, it seems to have done so under the impression that the government had agreed to indemnify it from losses in exchange for JPMorgan's assistance.
Here's how Dimon explains it in his latest shareholder letter:
[W]hile we certainly have made our share of costly mistakes, a large portion of our legal expense over the last few years has come from issues that we acquired with Bear Stearns and WaMu. These problems were far in excess of our expectations. [...] In the Bear Stearns case, we did not anticipate that we would have to pay the penalties we ultimately were required to pay. And in the WaMu case, we thought we had robust indemnities from the Federal Deposit Insurance Corporation and the WaMu receivership, but as part of our negotiations with the Department of Justice that led to our big mortgage settlement, we had to give those up.
To be fair, JPMorgan doesn't make for a sympathetic victim. There's no doubt, for instance, that its executives have enriched themselves at the unwitting expense of consumers and institutional clients for years -- though, this isn't to say that Jamie Dimon isn't an exceptional banker, because he is.
But these otherwise distasteful facts have no bearing on the sanctity of a contract -- or, in this case, on the validity of some type of verbal agreement or unstated understanding between JPMorgan and the government's negotiators.
In short, if the U.S. government gave the impression that it would indemnify JPMorgan for Bear Stearns and Washington Mutual's legal liabilities, then it should have done so.
The reason for this goes beyond the philosophical importance of the executive branch violating a multibillion contract with impunity. From the perspective of the financial industry, it could cause our leading banks to hesitate in a future crisis to form a private sector alliance and response, akin to JPMorgan's roles in 1893, 1907, 1984, 1998, and 2008, among other times.
This isn't desirable. But that appears to be where we are. According to Dimon:
In case you were wondering: No, we would not do something like Bear Stearns again -- in fact, I don't think our Board would let me take the call. The WaMu deal might still make sense but at a much lower price to make up for the ongoing legal uncertainty (including the government's ability to take away our bargained-for indemnities). I did not, and perhaps could not, have anticipated such a turn of events. These are expensive lessons that I will not forget.
The point here is that the U.S. government isn't doing itself, or American taxpayers, any favors. It shouldn't allow itself to be blackmailed, of course, but one has to believe that there's a more amenable way to bridge this divide than having the CEO of the nation's biggest bank venting and issuing veiled threats in his publicly released letter to shareholders -- which, no less, has been anointed required reading by Warren Buffett.