The Rising Cost of Bad Business
Eleven billion dollars. That’s the latest figure being leaked about the amount JPMorgan Chase
could end up paying to resolve federal charges concerning the sale of toxic
mortgage-backed securities in the run-up to the financial crisis. The word is
that Attorney General Eric Holder personally rejected a $3 billion offer from
the bank.
This is turning out to be an expensive period for JPMorgan. Earlier
this month, it and Assurant Inc. had to pay $300 million to settle accusations that
they forced homeowners into purchasing overpriced property insurance. A week
later, the Consumer Financial Protection Board announced that the
company would pay $80 million in fines and refund an estimated $309 million to
more than 2 million customers for illegal credit card fees.
That same day, U.S. and UK financial regulators announced that JPMorgan would pay a total of $920 million to settle charges relating to the London Whale trading fiasco, with the bank admitting that it had violated securities laws.
What should we make of these settlements, particularly the eleven-figure
one being hammered out with the Justice Department? To begin with, this is more
evidence that corporations can no longer get away with paying trivial amounts
to resolve criminal and civil charges and must part with amounts that have a
noticeable financial impact.
JPMorgan is not alone in this category. Billion-dollar
settlements have become almost commonplace in the various cases that have been
brought against major banks in connection with toxic securities as well as
foreclosure abuses, money laundering and manipulation of the LIBOR interest
rate index.
Banks are not the only corporations paying out large settlement
sums. Large pharmaceutical producers such as GlaxoSmithKline and Pfizer have
also parted with ten-figure sums to resolve allegations relating to illegal
marketing, withholding of safety data and defrauding federal healthcare
programs. BP paid $4 billion to resolve criminal and civil charges relating to
the Deepwater Horizon disaster.
There is a tendency among corporate critics to downplay these
settlements because the cases were brought against the companies rather than
their top executives. It is indeed frustrating to see CEOs that authorized
reckless behavior get off scot free.
Yet the more fundamental question is whether individual prosecutions
would be effective in deterring corporate misconduct. The assumption is that
seeing some chief executives put on trial would strike fear in C-suites
everywhere and cause firms to clean up their act. Some of this would occur, but
I am not convinced it would be enough to stop corporate criminality. After all,
high-profile cases against individuals have not put an end to insider trading.
Punishment of corporate executives needs to be accompanied by
more aggressive actions against the companies they work for. One thing is
clear: the new wave of billion-dollar settlements and penalties may be having a
more noticeable financial impact, but they are still a manageable cost of doing
business for the companies involved, especially in light of the fact that the
payments are often, at least in part, tax deductible.
Take the case of JPMorgan Chase. An $11 billion settlement would
not go entirely to the Treasury. Reports of the negotiations suggest that $4
billion of the total would take the form of relief to consumers, which means
that the payout could be stretched over a long period of time. We’ve already
seen considerable foot-dragging by the large banks (including JPMorgan) that
agreed last year to a $25 billion plan to address foreclosure abuses.
Even if JPMorgan had to shell out the remaining $7 billion in a
single year, it would be only one-third of the more than $21 billion in profits
it generated last year. That would hurt but would be far from fatal.
Rather than disparagement of rising monetary settlements, I’d
like to see more analysis of how high the penalties would have to go in order
to make a real difference in corporate behavior. It is also worth exploring
whether the property seizures used by federal prosecutors against individual
felons could be applied more aggressively against corporations. The discussion
of JPMorgan’s settlement would be a lot more interesting if the company was
facing a penalty such as forfeiture of one of its main business units.
Eric Holder & Company deserve some credit for raising the
cost of doing bad business, but the price is still far too low.
Note: To see my newly updated Corporate Rap Sheet on JPMorgan
Chase, click here.