Will JPMorgan's record settlement set incentive for better bank behavior?

JP Morgan Chase agreed to pay a record $13 billion in fines and compensation to investors and struggling homeowners. The nation's largest bank admitted it misrepresented mortgage-backed securities that collapsed in 2008. Gwen Ifill gets reaction from Lynn Stout of Cornell University and banking consultant Bert Ely.


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GWEN IFILL: J.P. Morgan's $13 billion settlement brings months of delicate, high-stakes negotiations to an end.

Under the terms of the deal, $4 billion will go to struggling homeowners in the form of reduced mortgage payments, lower loan rates and other assistance; $7 billion will go to investors as compensation. The remainder will be fines paid by the bank.

The agreement comes as investigators are said to be pursuing cases against other financial institutions as well.

Some assessment now of the deal's significance and its problems.

Lynn Stout is a professor of business law at Cornell University. She closely watches financial regulation. And Bert Ely is a banking consultant. He joins me here.

Bert Ely, what's your first sense of this deal? Was it a good deal for anybody?

BERT ELY, banking consultant: Well, I think, as much as anything else, it gets these problems behind J.P. Morgan Chase.

They had a tentative deal two weeks ago, and then that blew up. They're finally getting things solved, so they can get this behind them and move on with their business.

GWEN IFILL: Lynn Stout, what do you think overall? A good deal for whom?

LYNN STOUT, Cornell University: I think it's a great deal.

It's a good deal for the citizens and the taxpayers. I think this is the first time we have seen one of these big banks get hit with consequences that are large enough to get their attention, so it's a real breakthrough in a lot of the ways on the part of the government.

GWEN IFILL: Let me ask you first about this, Lynn Stout. In your reading of the agreement, does J.P. Morgan admit wrongdoing?

LYNN STOUT: Well, they don't admit to criminal wrongdoing directly, but they have agreed to a statement of facts.

They have agreed not to dispute what they did. And much of it boils down to plain old fraud. So that's a major concession that's going to have an effect on their ability to defend themselves against future civil charges by other parties.

GWEN IFILL: Is that your reading of it, too, Bert Ely?

BERT ELY: Well, I think it's important to realize that a portion of this penalty and settlement is really -- grows from actions by Bear Stearns and Washington Mutual before they were acquired by J.P. Morgan Chase. So it's important to realize that J.P. Morgan Chase and its management is not responsible for the total amount of this problem.

GWEN IFILL: But it's -- they're also not being excused from that in part of this deal, which is what they wanted, right?

BERT ELY: Well, that's true. And as Lynn pointed out, there could well be other litigation that grows out of this, and that's one of the things. We will have to see how that plays out.

GWEN IFILL: Lynn Stout, one of the things we sometimes lose sight of in these big agreements is exactly how it affects people.

So if you are an affected homeowner who got one of these toxic loans sold to them by this bank, do you get any kind of -- any kind of repayment for that?

LYNN STOUT: Well, there's about $4 billion set aside for homeowner relief. And that sounds like a big number, but the fact is, the mortgage market measures in the tens of trillions.

So I'm sure there will be some homeowners who will be very glad for a little bit of relief, but it's not going to make that much of a difference for most homeowners. The big effect of this settlement is the possibility that it's going to create an incentive for banks to behave better in the future. It's a real message. It's a real warning that now there's the possibility of real consequences.

GWEN IFILL: Does this actually make banks think, OK, I'm not going to misbehave, because look what happened to Jamie Dimon, the CEO of J.P. Morgan Chase?

BERT ELY: Well, I think the thing to keep in mind is that these mortgages were originated back in the time when we had a real bubble in housing prices.

There was a tremendous push on to increase homeownership. The regulatory environment was very different then. And at least for the foreseeable future, I don't see this problem emerging.

Maybe 10, 15 years down the road, it could again. But in the current environment, this kind of problem is not -- simply not going to emerge.

GWEN IFILL: Lynn Stout, you were going to say something to that.

LYNN STOUT: Yes, I wish I were as optimistic as Bert is.

But the fact is, they have got real short memories on Wall Street. I think the banks are going to behave better, be more cautious. They're not going to commit these sorts of deceptions for four or five years. But we still have basic structural problems. We still have not implemented effective financial reform. And I can see us repeating this scenario five, six years down the road.

GWEN IFILL: I do have to ask you that question, Bert Ely, whether, if you are -- if you are Jamie Dimon, if you are Bank of America, do you feel like this is a sign that business has to be done usually -- done differently or financial reform is going to be imposed on you?

BERT ELY: Well, first of all, an awful lot of financial reform has been imposed on the industry. It was in the process of being imposed on the industry as a result of regulations that were authorized by the Dodd-Frank act a few years ago.

And those regulations are being put in place right now. And, quite frankly, the consequence of these regulations may be to overly tighten the availability of mortgage credit, particularly for those who have less-than-pristine credit records. And so you have a situation where the pendulum swings back and forth.

Right now, it is swinging towards possibly excessive restrictiveness on the availability of mortgage credit. At some point in time, then it may swing back. But, for the short term, I don't see this type of problem emerging.

GWEN IFILL: When Jamie Dimon first went to the Department of Justice and started to negotiate that, the reports were that he came to the table and said, I have got -- how about $3 billion? And they said, I don't think so.

Did he lose in the end?

BERT ELY: Well, first of all, this penalty and the fines and the settlement costs are being ultimately borne by the shareholders of J.P. Morgan Chase. So I think we have to realize that they're the ones that are ultimately paying for this.

And, you know, they are going to be suffering some because of this. But the important thing is, they get the problem behind them, they can move on. And I think that's very important for J.P. Morgan Chase.

GWEN IFILL: Lynn Stout, could the government have gotten more? Could it have held out for more than $13 billion -- $14 billion?

LYNN STOUT: Oh, you know, possibly, in theory.

But this is a real breakthrough on the part of the government. We haven't seen anything of this size in terms of consequences -- consequences imposed on banks. Earlier cases have been settled for amounts in the hundreds of millions. That sounds like a lot, but for most banks, it's just the cost of doing business.

This settlement amounts to almost half of J.P. Morgan's profits for 2012. And it's not going to affect the shareholders nearly as deeply as it's going to be felt in the declining bonuses for the employees. And that's where the hope lies in changing bank behavior. This is really going to affect the bonus pool at J.P. Morgan, and that is going to get people's attention.

GWEN IFILL: There's still an outstanding -- Bert Ely, there's still an outstanding criminal investigation, which this was -- this doesn't take off the table, right?

BERT ELY: That -- that is correct. This is just a matter of settling civil charges. And we don't know how the criminal aspect of it is going to play out.

GWEN IFILL: And the London whale case that we all heard so much about, that is not part of this either.

BERT ELY: No, this is totally separate from the London whale case.

That was a matter of trading losses, and it has absolutely nothing to do with the mortgage issues that were addressed here in this settlement.

GWEN IFILL: Lynn Stout, are you satisfied that this is a civil agreement and that -- and the criminal case is yet to come?

LYNN STOUT: Yes, I think so.

This chapter is not finished for J.P. Morgan. There's still the possibility of criminal investigations. As part of the settlement, the bank has agreed to cooperate in assisting those investigations. They have made admissions to facts that are going to make it easier for other investors who feel they have been defrauded to bring civil action.

So this is certainly progress, but this is by no means over for J.P. Morgan.

GWEN IFILL: Lynn Stout at Cornell, Bert Ely here with me, thank you both so much.

BERT ELY: Thank you for having me here.

LYNN STOUT: Thanks.