Now that JPMorgan Chase & Co. and the Federal Housing Finance Agency are on the verge of a $4 billion settlement, it’s worth revisiting the occasionally prominent role that Jamie Dimon played in the complaint against the company by the government conservator for Fannie Mae and Freddie Mac.
This also is an opportune time to point out a noteworthy difference between the approaches taken by the Securities and Exchange Commission and the housing-finance agency in going after JPMorgan. The SEC’s claims over the London Whale trading scandal last month didn’t name names. The housing-finance agency’s lawsuit in 2011 over faulty mortgage bonds did.
The SEC’s administrative order -- part of a $200 million settlement in which JPMorgan admitted to violating federal securities laws without specifying which ones -- referred to “senior management” more than 100 times. Most of the time you can’t tell whom the SEC is referring to, which was by design. The SEC said it used the term to refer to “one or more of the following individuals who held the listed positions as of May 10, 2012: the JPMorgan chief executive officer, the JPMorgan chief financial officer, the JPMorgan chief risk officer, the JPMorgan controller, and the JPMorgan general auditor.”
JPMorgan’s CEO, of course, is Dimon. In contrast to the cozy settlement papers between JPMorgan and the SEC, Dimon’s name appears several times in the Federal Housing Finance Agency’s amended complaint against the company over faulty mortgage bonds that were sold to Fannie Mae and Freddie Mac, although Dimon wasn’t named a defendant.
Attorneys for the Fannie-Freddie conservator relied in part on Dimon’s January 2010 testimony to the Financial Crisis Inquiry Commission and tried to use his words to buttress the agency’s case. In one section, the agency said that JPMorgan’s home-mortgage division, Chase Home Finance, originated many of the loans underlying the mortgage bonds that JPMorgan sponsored. The agency said the unit’s “departure from industry standards was confirmed by Jamie Dimon” when he testified to the crisis commission that “the underwriting standards in our mortgage business, for example, should have been higher, and we wish we had done an even better job in managing our leveraged lending and mortgage-backed securities exposures.”
Another section of the complaint used Dimon’s crisis-commission testimony to assert that he had confirmed the mortgage division’s overreliance on third parties to originate loans. To that end, the agency included the following quotes from Dimon: “We’ve also closed down most -- almost all of the business originated by mortgage brokers where credit losses have generally been over two times worse than the business we originate ourselves.” The agency also included his statement that “there were some unscrupulous mortgage salesmen and mortgage brokers. And, you know, some people missold.”
Another paragraph from the complaint, again citing Dimon’s testimony to the crisis commission, said: “When asked whether JPMorgan conducted stress tests in order to prevent its exposure to these systemic risks and what risk management procedures were in place, Mr. Dimon replied: `[i]n mortgage underwriting, somehow we just missed, you know, that home prices don’t go up forever and that it’s not sufficient to have stated income in home [loans].’ Mr. Dimon further confirmed this failure of basic due diligence when he was later quoted as saying,`[t]here was a large failure of common sense’ because `[v]ery complex securities shouldn’t have been rated as if they were easy-to-value bonds.’”
The agency’s complaint also alleged that Dimon was the person responsible for JPMorgan’s decision in 2006 to begin selling its subprime-loan holdings, after the company grew alarmed at the increasing rate of late payments. (The references to GSEs in the next paragraph refer to Fannie and Freddie, which are government-sponsored enterprises.)
Again from the lawsuit: “Despite Mr. Dimon’s view that JPMorgan’s subprime holdings `could go up in smoke!’ and JPMorgan’s decision to sell its own holdings in subprime assets, JPMorgan continued to originate and securitize poorly underwritten mortgage loans and vouch for their quality. This was the time period in which the GSEs acquired a significant amount of the JPMorgan certificates, relying on JPMorgan’s representations that the mortgage loans were underwritten in accordance with JPMorgan’s purported underwriting standards.”
It went on: “JPMorgan waived a significant (over 51 percent) number of the loans rejected by its third-party due diligence firm into loan pools for securitization. JPMorgan also abandoned its underwriting standards in directing its employees to enter untrue and misleading information into its automated underwriting system in order to generate approvals for loans that would otherwise be rejected.
“Finally, JPMorgan CEO Jamie Dimon himself knew that subprime positions were risky and dangerous; all the while JPMorgan continued to originate, acquire and securitize defective and credit-impaired loans for inclusion in its securitizations.”
We may never know how much of what the conservator alleged is true. But we have an idea of how much the FHFA’s claims on behalf of Fannie and Freddie will cost JPMorgan now that the sides have reached a tentative settlement. How much blame does Dimon bear? Most JPMorgan shareholders seem unconcerned. They’re just glad the company is putting more of its litigation woes behind it.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)