How do you lose $13 billion?
JP Morgan recently agreed to a civil settlement worth $13 billion. The numbers stagger the imagination. That’s more than the market cap of most business. What did they do to earn such a fine?
At issue was a 2006 decision by JP Morgan managers to accept mortgages from Greenpoint Mortgage, despite their substandard nature, and bundle them into mortgage-backed securities that JP Morgan sold—without warning investors that some of their collateral was substandard. Well, “substandard” is generous: these loans wouldn’t even qualify as sub-prime. They had inflated appraisals and overstated income, and even then had lousy ratios.
Fair disclosure is critical to well-functioning markets. If investors want to buy Workday—the high-flying cloud-based payroll manager that hasn’t made money in 8 years whose stock price is soaring—that’s their business. Hope springs eternal in the high-tech world. But when investors buy supposedly safe bonds based on false promises—as opposed to faulty premises—that’s different. It isn’t just foolish, it’s fraudulent.
So now $4 billion will go for mortgage relief and $9 billion to the Federal and State governments. Which leaves just one question: are there more lawsuits to come?
Douglas R. Tengdin, CFA
Chief Investment Officer