Bankers Roulette

In Monday’s New York Post:

“While JPMorgan Chase is still putting the finishing touches on a record $13 billion settlement over sales of soured mortgage securities, Jamie Dimon is already looking forward to putting the bank’s legal woes behind it.

“We are going to resolve every matter as best as we can, and then we’re going to move on and serve our clients,” Dimon told CNBC outside JPMorgan’s corporate offices at 270 Park Ave. in Midtown.

“I am so damn proud of this company,” he added. “That’s what I think about when I wake up every day.”

Dimon was spotted on his way to work Monday morning after reaching a tentative deal with the Justice Department, the Federal Housing Finance Agency and the New York attorney general, among others, over the sale of mortgage-backed securities.”

Why? Why is Chase and soon, Bank of America and Wells Fargo, being forced to pay hefty fines to the federal government for activities done by the banks each of them acquired at the behest of the Fed, the FDIC and the Department of the Treasury, in order to avoid a greater calamity than what actually happened? After all, had these banks refused to do what they did, the Treasury and FDIC would have been forced to take Bear Sterns and WAMU (Chase), Countrywide (BofA) and Wachovia (WF) into receivership and pay out billions of dollars to insured depositors, and bankrupt the insurance fund in the process.

Then, where would we be?

Think about this also. The Fed, the Treasury and the FDIC, with the consent of the Congress, forced the top banks in the country to take TARP funds, when clearly it was unnecessary to do so. Chase, Citi, BofA, Goldman, Wells, State Street and others took the prescribed amounts the Treasury required, under the terms the Treasury dictated, and within less than six months’ time, most of the banks paid the full amount signed for, with interest.

If you recall, the Treasury was anxious  during that critical week in September, 2008 because Lehman Bros was forced to declare bankruptcy as no entity wanted to assume the toxic assets on Lehman’s books, no matter what arrangement could be made. In addition, insurance giant AIG was taken by the Treasury since most of the mortgage-backed securities on its books were also toxic. And finally, Fannie and Freddie were also under Federal protection since, while they were technically private companies, they were government sponsored entities (GSEs), which meant the government was involved in the operation of the companies.  So, to have the other failing banks actually close, would have been an unmitigated disaster.

Ultimately, while the acquiring banks also had issues with their mortgage programs, what they acquired was so much worse. And they did it anyway, because Treasury had no other recourse, but to assist in the acquisitions by hook and crook. And now the federal government is taking its five pounds of flesh.

So what is the lesson here?

To this retired banker, the next time the banks get into trouble (as history shows, it will happen again), the acquiring bank needs to get a letter of relief or other document to protect itself from the wrath of the government at some future date. Otherwise, the acquiring bank will be well within its rights to tell the FDIC, etc, to take a hike. The FDIC will then be in the precarious position to either allow the acquirer to protect itself or watch the failing bank collapse and pay the depositors out.

Remember, the government is working from the premise that the seven largest banks are “too big to fail”. And these  seven banks hold almost 70% of the total banking balances in the United States. If any one of them failed now, there would  be no more American economy because the faith and credit of the United States would be gone.

And the next day, Mandarin would be the official language of this county.