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The JPMorgan exception

Can a heroic knight who rescues a damsel from certain death sue the damsel's parents when she turns out to have been a huckster who left angry claimants all over Camelot? That's the question confronting JPMorgan Chase and federal prosecutors as they try to conclude a probe into possible securities fraud by the giant bank and one of the failing institutions it bought after the housing bubble burst, Washington Mutual.
Can a heroic knight who rescues a damsel from certain death sue the damsel’s parents when she turns out to have been a huckster who left angry claimants all over Camelot? That’s the question confronting JPMorgan Chase and federal prosecutors as they try to conclude a probe into possible securities fraud by the giant bank and one of the failing institutions it bought after the housing bubble burst, Washington Mutual.
(Seth Wenig / Associated Press)
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JPMorgan Chase is trying to reach a multibillion-dollar deal with the federal government to settle allegations of securities fraud — based largely on claims against two failing banks it rescued during the crisis at Washington’s behest. The settlement apparently hinges on whether JPMorgan will be allowed to tap a government fund to cover some of the cost of the government’s claims. If so, that would be a truly perverse outcome.

The government’s case stems from the sale of mortgage-backed securities — bundles of home loans that lenders didn’t want to keep on their books — that failed spectacularly after the housing bubble burst. The securities in question were sold not just by JPMorgan but also by Bear Stearns and Washington Mutual, which JPMorgan later acquired on the brink of insolvency (Bear Stearns) or in government receivership (WaMu). Prosecutors contend that the banks defrauded investors by giving false information about the quality of the mortgages in the securities they sold.

Last week, JPMorgan resolved part of the case without admitting wrongdoing, agreeing to pay $5.1 billion to settle claims by Fannie Mae and Freddie Mac. Still outstanding are billions of dollars in claims related to other buyers of mortgage-backed securities and to homeowners who now owe more than their homes are worth. But JPMorgan contends that when it bought WaMu from the government, it agreed to take only the liabilities that were already known, not ones that would emerge later. To hold it liable for new claims based on WaMu’s bad behavior would only make it harder for the government to recruit rescuers in the future, the bank’s defenders say.

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That contention, however, ignores the fact that JPMorgan acquired the assets of WaMu (and Bear Stearns) at a huge discount, in part because of the expected problems with mortgage-backed securities. The bank has made billions of dollars off those assets since then. And one can only imagine the lesson Wall Street would take away if WaMu were allowed to wipe out liability for securities fraud just by being acquired. Wouldn’t that encourage more of the fast-and-loose banking that crashed the economy last time?

JPMorgan did the public a favor when it kept Bear Stearns and WaMu from having to go through costly liquidations. But it acquired those assets at a price that was good for JPMorgan. It’s worth noting that the only civil penalties the government has reportedly sought are for things JPMorgan did on its own, not the actions of Bear Stearns or WaMu. That’s appropriate. But the bank shouldn’t be excused from having to spend some of the assets it acquired paying back those who have legitimate claims against Bear Stearns and WaMu.

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