Four Takeaways from JPM's Massive $13B Mortgage Settlement

WASHINGTON – In theory at least, JPMorgan Chase's tentative $13 billion settlement with federal regulators is a devastating blow for the bank, costing it roughly half of last year's profit and once again portraying the institution as the poster child for bad bank behavior.

But in reality, the deal may set the country's largest bank free, allowing CEO Jamie Dimon to finally put a series of scandals to rest and get back to what he does best – making money.

It's financial regulators – and other big banks – who will likely suffer in the long-term from the deal.

Following is a guide to the key takeaways from the deal:

1. Dimon Will Survive

In the wake of the more than $1 billion worth of fines and restitution paid by JPMorgan last month, pundits were already speculating that Dimon's days as CEO are numbered. In the days ahead, assuming the bank finally finalizes its new deal with the Justice Department and Federal Housing Finance Agency, that talk is only likely to increase.

Dimon's reputation has undoubtedly taken a hit, but he's in a far better position than most might assume. A large chunk of the latest settlement concerns products developed and sold by Bear Stearns and Washington Mutual prior to their purchase by JPMorgan. As a result, many shareholders see these as legacy issues that need to be resolved, but which don't reflect poorly on JPMorgan's management.

"Many may want to get rid of Dimon, but those folks don't actually own the company," said Jaret Seiberg, an analyst with Guggenheim Securities. "Those who do own JPMorgan – the shareholders – want him to stay. That is why efforts to unseat him go nowhere. This latest settlement doesn't change that. Investors have confidence in his ability to ensure that JP Morgan makes money."

Diane Glossman, a former longtime bank analyst who now consults and sits on the board of financial companies, said she expects the settlement to have a positive impact on Dimon. She argues that his shareholders will be relieved to have problems from the financial crisis resolved.

"Institutional investors are well aware of these [legacy issues] situations and I think are anxious to move to certainty through settlements."

Even at $13 billion, the settlement isn't too high a price tag, Glossman added.

"I'm sure you can come up with a number that's so high that would change investor perceptions, but the number you're talking about is not that," she said.

2. The Government Has Lost a Valuable Tool for Future Crises

Perhaps the single largest policymaking implication of the deal is that it makes it much more difficult – if not impossible – for regulators to encourage healthy banks to purchase ailing ones in a crisis. Federal regulators have often used such a tactic in the past, including during the savings and loan crisis and the 2008 housing crisis.

JPMorgan's purchase of Bear Stearns and WaMu, done at the behest of federal regulators, was hugely beneficial to the government. In one case, it stemmed market panic in the spring of 2008. In the other, it enabled the government to oversee the largest bank failure in American history at no cost to itself.

Yet those deals have now come back to haunt JPMorgan. With little time to sort through the potential legal liabilities of those purchases, JPMorgan undoubtedly knew it would get hit at some stage – but likely did not anticipate the large price tag of the settlement.

Buying Bear and WaMu may still be a net gain for JPMorgan, but it's probable that going forward, banks will be reluctant to step in when regulators come calling.

"I do not understand the public policy interest being served and without question these lawsuits will make it much more difficult and expensive to manage the next financial crisis," said William Isaac, a former chairman of the Federal Deposit Insurance Corp. and now chairman of Fifth Third Bancorp.

At the very least, banks will likely demand a release from legal liability before agreeing to any regulatory request.

"The key in these settlements for JPMorgan related to the Bear Stearns/Wamu paper is the lack of protection from legal liability built into both agreements," said Karen Shaw Petrou, managing director of Federal Financial Analytics. "It is my understanding that JPM sought this, at least with regard to Wamu, but decided to do the deals without it. The lesson: sometimes bargains are indeed too good to be true."

3. Bank of America Likely to Face Hatchet Next

JPMorgan's $13 billion settlement includes roughly $4 billion paid to the FHFA for loans that were sold to Fannie Mae and Freddie Mac. But FHFA has sued several other big banks, including Bank of America (BAC), Royal Bank of Scotland (RBS), Deutsche Bank (DB) and 10 others. The FHFA sued 18 banks in 2011 over allegations that they misrepresented the quality of loans packaged into bonds near the peak of the housing bubble. So far, only Citigroup (NYSE:C), General Electric (GE), UBS AG have settled.

In its filings, the FHFA has said Fannie and Freddie bought $6 billion in mortgage-backed securities from B of A, $24.8 billion from Merrill Lynch, which it bought in 2008, and $26.6 billion from Countrywide Financial, which it bought the same year. That could explain why analysts grilled B of A's CFO Bruce Thompson on a conference call last week about whether the Charlotte, N.C. bank has set aside enough reserves to cover all pending litigation. 

B of A has already paid out $40 billion in settlements. Analysts with Morgan Stanley have estimated B of A's exposure to FHFA's claims is below $4 billion.

Of the largest banks, only Wells Fargo was not sued at all by FHFA. Wells would seem to be in the same boat as JPMorgan because in 2008 it absorbed Wachovia and with it the former World Savings, with its shaky mortgage portfolio. But unlike Bear Stearns or Lehman Brothers, Wachovia was not a big securitizer of mortgages, so it is not in the same situation, lawyers say. Unlike B of A and JPMorgan Chase, Wells is fighting a separate government lawsuit over loans insured by the Federal Housing Administration. Overall, however, it's clear that this settlement will help JPMorgan move forward – but other banks may still have to pay up.

"JPMorgan's legal troubles and settlement costs may be large relative to other banks', but not unusually so," said Urska Velikonja, assistant professor of law at Emory University School of Law. "Other banks are facing similar scrutiny over mortgage lending, commodity-market manipulation, Libor fixing, etc."

4. Banks Are Still "Too Big to Jail"

In the wake of the financial crisis, federal regulators have pushed hard to raise the settlement totals demanded of banks, partly as an effort to cover up their own failure to adequately police the system prior to the housing collapse and also as a sop to public outrage over the bank bailouts.

The Justice Department in particular has faced fierce criticism because of its unwillingness to criminally prosecute bankers for misdeeds related to the crisis. That situation was worsened when Attorney General Eric Holder acknowledged to lawmakers in March that some institutions are so large, prosecutors are reluctant to take action against them for fear of the impact on the economy. (Holder later tried to claim that he was not suggesting firms were "too big to jail," but the damage was already done.)

The sheer size of the JPMorgan settlement suggests Justice wants an eye-popping number that sends a message to other banks and the general public that it is not afraid to punish the largest institutions. The settlement also will not include a release from potential criminal prosecution of JPMorgan executives, according to media reports. That signals Justice is considering pursuing the bank in the criminal justice system.

Yet privately JPMorgan lawyers are said to be convinced the government's case is weak. And more broadly, it seems clear that the government pushed for such a large settlement because JPMorgan was in a position to pay the fine without hurting the broader economy.

"The problem is somebody has to be to blame, and these settlements are targeting the last available deep pockets," said one bank lawyer who spoke on condition of anonymity.

Absent more substantial actions, the public perception that some institutions are above the law is likely to stay intact.

Maria Aspan and Marc Hochstein contributed to this article.