The $13 billion settlement between JPMorgan Chase & Co. (NYSE: JPM) and the federal government shocked markets this week, as the fines would be a record paid by a Wall Street institution.
According to reports, the sum will amount to approximately half of the company's 2012 profits.
The JPM settlement is another black eye for the company and its weathered Chief Executive Officer (CEO) Jamie Dimon, who had emerged from the financial crisis as a pseudo cult figure with Teflon status.
The deal is the largest in a string of 8-, 9-, and 10-figure settlements between the bank and its regulators. Once the house that Morgan built, its status has withered as a result of these deals.
It's expected that both Dimon and the bank will survive once again, but two questions have again emerged from this news.
First, who will be next to feel the hammer of regulators; second, are these banks still too big to fail?
Post-JPM Settlement: Who Will Be Next?
JPMorgan will pay about $4 billion of that settlement to the Federal Housing Finance Agency (FHFA) on loans the bank sold to Fannie Mae and Freddie Mac, the two housing giants that collapsed into government hands in fall of 2008.
The FHFA has taken legal actions against 18 institutions over bad mortgage bonds in 2011, including Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), and UBS. However, only Citigroup, General Electric Co. (NYSE: GE), and UBS have settled.
The FHFA is attempting to recover part of the losses that taxpayers absorbed when Fannie and Freddie were nationalized and received $187.5 billion in federal aid. In addition to the JPMorgan settlement, only the UBS deal has been disclosed at a total of $885 million for bad loans it passed from 2004 to 2007.
According to Bloomberg, the FHFA has now targeted Bank of America.
It is seeking $6 billion in civil claims. Since Bank of America acquired Countrywide Financial in 2008, regulators have placed the company under increased scrutiny due to the mortgage business.
This follows speculation last week when Bank of America analysts grilled the company's CEO Brian Moynihan during its third-quarter conference call over the company's ability to cover the costs of litigation.
During the call, Moynihan told CLSA analyst Mike Mayo that the bank has $14.1 billion in reserves, which includes $8.5 billion from a pending settlement on bad mortgages sold by Countrywide. That settlement might change and could threaten the $5.5 billion left for the company to hand its current legal troubles.
With another big bank in the FHFA's sights, does this mean the winds of [regulation] change have finally swept over Wall Street?
The JPM Settlement: What It Is, What It Isn't
Americans remain angry over the inability of the justice system to hold anyone accountable on Wall Street for the financial crisis.
Where more than 1,000 people from the Occupy Wall Street movement were jailed in street protests and other crimes, no executives from Wall Street have been held accountable for the crisis.
But now, the Justice Department is seeking litigation with "any individual or any institution" that was in any part responsible for the financial crisis. That hunt has gone to international levels as well.
According to Handelsblatt, Deutsche Bank has spoken with 50 employees to determine whether members of the company were engaged in rigging the Libor interest rate.
Meanwhile, in Italy, a UBS banker was arrested and accused of aiding American investors in hiding money in Switzerland.
Still, none of these investigations or charges are criminally linked to the wide-scale financial crisis experienced in 2008.
The Justice Department has signaled a reluctance to prosecute Wall Street for any loan schemes, interest-rate swap deals, and reckless purge of the U.S. Treasury. In March, Attorney General Eric Holder hinted that some banks were so large and vital to the health of the global economy that they were not capable of trying and convicting these actors. This complemented investigations that certain banks had been tied to international money laundering for drug syndicates.
The settlement with JPMorgan, however, will not stop the Justice Department from seeking criminal charges against the company's executives - but it's very clear that, from a criminal standpoint, the case against JPMorgan is weak.
Instead, the government is seeking to punish the company financially.
Unfortunately, that punishment will only impact the holdings of shareholders.
The settlements aren't doing anything to address the failures of Dodd-Frank to end Too Big to Fail, or the wasteful regulatory efforts like Sarbanes Oxley.
Moving forward, Washington may shake down Wall Street, but it's unclear when they're going to get serious about shutting the revolving doors, ending policies that favor the banks, and stopping Too Big to Fail once and for all.
For more on the power wielded by these "Too Big to Fail" banks, read Shah Gilani's The Greatest Criminal Enterprise in the World