Reports that the US banking giant JP Morgan has reached an agreement to pay a record settlement to the US Justice Department over mis-sold securities are drawing superlatives. The bank is America’s biggest and the tentatively agreed figure of $13bn, if it is paid out, would be the largest single settlement ever offered by an American company.
While the fine looks colossal, we need to keep in mind that JP Morgan is worth over $2.5 trillion and recorded quarterly profits of around $6bn last year. It posted a loss over the last quarter, but only because it set aside billions in legal bills. Strip that out, and the bank would have recorded another $6bn profit in September.
In other words, the settlement is equivalent to the profits that the bank might expect to generate over two quarters in a normal year, which is substantial, but not as punitive as it looks at first glance. Indeed, given the bank’s role in prompting some of the disasters that have struck banks throughout the West since 2008, you could say that it is getting off lightly.
What the bank did was sell mortgage-backed assets although it knew that many of the home loans were risky, and it was able to escape scrutiny while doing this because it was trading on a reputation for probity and competence that it clearly no longer deserved. These assets then played a key role in triggering the near-collapse of the international banking system when banks discovered that many of their assets were worth only a fraction of their value on the books.
Whether the fine will curb the culture of arrogance and impunity that has become a feature of banks deemed too big to fail remains to be seen. The lesson of 2008 was that if banks grow too vast, they become almost unmanageable as well as arrogant, which was what went wrong at JP Morgan, and explains why such behemoths need to be broken up. This has not happened, unfortunately. As the lesson has remained unlearned, history may well be condemned to repeat itself.