Thirteen billion dollars requires some perspective. The record amount that JPMorgan Chase (JPM) has tentatively agreed to pay the U.S. Department of Justice, to settle civil investigations into mortgage-backed securities it sold in the runup to the 2008 financial crisis, is equal to the gross domestic product of Namibia. It’s more than the combined salaries of every athlete in every major U.S. professional sport, with enough left over to buy every American a stadium hotdog. More significantly to JPMorgan’s executives and shareholders, $13 billion is equivalent to 61 percent of the bank’s profits in all of 2012. Anticipating the settlement in early October, the bank recorded its first quarterly loss under the leadership of Chief Executive Officer Jamie Dimon.
That makes it real money, even for the country’s biggest bank by assets. Despite this walloping, there’s reason for the company to exhale. The most valuable thing Dimon, 57, gets out of the deal with U.S. Attorney General Eric Holder is clarity. The discussed agreement folds in settlements with a variety of federal and state regulators, including the Federal Deposit Insurance Corp. and the attorneys general of California and New York. JPMorgan negotiated a similar tack in September, trading the gut punch of a huge headline number—nearly $1 billion in penalties related to the 2012 London Whale trading fiasco—for the chance to resolve four investigations in two countries in one stroke. In both cases, the bank’s stock barely budged; its shares have returned 25 percent this year, exactly in line with the performance of Standard & Poor’s 500-stock index.
That JPMorgan is able to withstand penalties and regulatory pressure that would cripple many of its competitors attests both to the bank’s vast resources and the influence of the man who leads it. The sight of Dimon arriving at the Justice Department on Sept. 26 for a meeting with the attorney general underscored Dimon’s extraordinary access to Washington decision-makers—although the Wall Street chieftain did have to humble himself by presenting his New York State driver license to a guard on the street. As news of the settlement with Justice trickled out, the admirers on Dimon’s gilded list rushed to his defense, arguing that he struck the best deal he could. “If you’re a financial institution and you’re threatened with criminal prosecution, you have no ability to negotiate,” Berkshire Hathaway (BRK/A) Chairman Warren Buffett told Bloomberg TV. “Basically, you’ve got to be like a wolf that bares its throat, you know, when it gets to the end. You cannot win.”
The challenges facing Dimon and his company are far from over. With the $13 billion payout, JPMorgan is still the subject of a criminal probe into its mortgage-bond sales, which could end in charges against the bank or its executives. And other federal investigations—into suspected bribery in China, the bank’s role in the Bernie Madoff Ponzi scheme, and more—are ongoing.
The ceaseless scrutiny has tarnished Dimon’s public image, perhaps irreparably. Once seen as the white knight of the financial crisis, he’s now the executive stuck paying the bill for Wall Street’s misdeeds. And as the bank’s legal fights drag on, it’s worth asking just how many more blows the famously pugnacious Dimon can take.
Although the $13 billion settlement would amount to the largest of its kind in the history of regulated capitalism, it looks quite different broken into its component pieces. While the relative amounts could shift, JPMorgan is expected to pay fines of only $2 billion to $3 billion for misrepresenting the quality of mortgage securities it sold during the subprime housing boom. Overburdened homeowners would get $4 billion; another $4 billion would go to the Federal Housing Finance Agency, which regulates Freddie Mac (FMCC) and Fannie Mae (FNMA); and about $3 billion would go to investors who lost money on the securities, Bloomberg News reported.
JPMorgan will only pay fines (as distinct from compensation to investors or homeowner relief) related to its own actions—and not those of Bear Stearns or Washington Mutual, the two troubled institutions the bank bought at discount-rack prices during the crisis. Aside from shaving some unknown amount off the final settlement, this proviso enhances Dimon’s reputation as the shrewdest banker of that era. In 2008, with the backing of the U.S. Department of the Treasury and the Federal Reserve, who saw JPMorgan as a port in a storm, Dimon got the two properties for just $3.4 billion. Extending JPMorgan’s retail reach overnight into Florida and California, Bear and WaMu helped the bank become the largest in the U.S. by 2011. The portions of the settlement attributable to their liabilities are almost certainly outweighed by the profits they’ve brought and will continue to bring.
JPMorgan seems to have benefited from Dimon’s direct involvement in the negotiations with Holder. A second-term attorney general, Holder held an unbeatable advantage that he refused to drop: the criminal investigation into the mortgage-bond sales. He rejected JPMorgan’s initial offers to pay a significantly lower fine. But in a series of phone calls, Dimon gained a measure of closure for his company. The Obama administration got its record-setting sum, and JPMorgan cleared the civil probes from its slate to focus on the criminal probe and the rest of its litigation woes.
The fate of the remaining investigations will go a long way toward defining Dimon’s legacy. At the height of his postcrisis swagger, Dimon goaded top regulators in public, even as he basked in being known as President Obama’s “favorite banker.” His image has since been diminished; the $6 billion London Whale losses and subsequent penalties have ended all talk of his being the best risk manager on Wall Street. Although he swatted down a shareholder referendum in May on his fitness to serve as both chairman and CEO of JPMorgan, Dimon now cuts a far less intimidating figure in the capital. In a meeting of bank executives at the White House in early October, Dimon was shunted to a corner of the room, according to the Wall Street Journal. The once-plausible notion that Obama—or a successor from either party—might tap Dimon for a cabinet job, such as Treasury secretary, is now a punch line.
That said, the Obama administration didn’t rip Dimon’s throat out—to continue Buffett’s lupine analogy—by insisting on his resignation as part of the settlement package. The negotiation between the two parties was slowed by the government shutdown, which ended Oct. 16, on the eve of a terrifying deadline—a first-ever U.S. default on its debt, which might have unleashed global financial havoc rivaling or even surpassing the 2008 crisis. Dimon may run a bank under a disturbingly dark cloud of federal scrutiny. But with the U.S. facing another debt-ceiling breach on Feb. 7, there is value to the government in having him in the same position that he occupied the last time it needed a savior.
For the foreseeable future, Dimon’s hold on his job is secure. It’s undeniable, though, that he has been cut down to size—still the successful executive of a huge financial institution, but no longer a colossus able to bend markets and policymakers to his will. JPMorgan’s lucrative operations will proceed, but so will the costs of fighting the many investigations in which the bank remains ensnared. Analysts expect the bank to return to profitability in the fourth quarter, earning more than $5.3 billion. On a conference call on Oct. 11, Dimon answered a question about whether the bank’s spending up to $2 billion per quarter on litigation expenses was “the new normal.” Dimon said yes. “It will abate over time, and the underlying power of the company you can see,” he said. “I wish I could give you a better answer, but one day it won’t be a big number.”