The $13 Billion Question

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

By | 2013-11-20T10:46:01+00:00 November 20th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

Leave A Comment