What the JPM Settlement Means for Wall Street

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

Garrett Baldwin

About the Author

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Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.

Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.

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