California pension funds picked up $299 million Tuesday as part of the federal government’s record $13-billion settlement with JPMorgan Chase over the crappy mortgages the bank wrapped into suspect securities and sold as quality investments.
The packaging of risky mortgages in exotic leveraged securities laid the groundwork for the financial meltdown that precipitated the ongoing Great Recession. The settlement with JPMorgan is actually a series of settlements with different injured parties. The Federal Housing Finance Agency (FHFA), which oversees government mortgage financing companies Fannie Mae and Freddie Mac, gets $4 billion, and $5 billion covers civil penalties to the U.S. Department of Justice and other state and federal government entities.
The Department of Housing and Urban Development (HUD) gets $4 billion for a consumer-relief package that will benefit California and other states. That is not a cash outlay for JPMorgan. Much of it is loan forgiveness and adjustment for people who are underwater on their mortgages.
In exchange for its largess, JPMorgan will get a large tax break.
A number of groups had lobbied the Justice Department to specifically bar the bank from using the payout as a tax deduction. Americans for Tax Fairness and the U.S. Public Interest Research Group (PIRG) gave Congress a petition with 160,000 signatures asking that provision be added. Representative Peter Welch (D-Vermont) said after the announcement Tuesday called on JPMorgan CEO Jamie Dimon to “do the right thing” and voluntarily eschew the tax break.
It doesn’t sound like the company will take his advice.
JPMorgan Chief Financial Officer Marianne Lake said that $7 billion will be tax-deductible, and the bank will claim it. Gregg Polsky, a law professor at the University of North Carolina, told Reuters, “The settlement should cost JPMorgan about $9 billion, because about $11 billion of the settlement is tax deductible.”
If Polsky is right, taxpayers will pick up about $4 billion of the total $13 billion settlement.
The IRS and, possibly, the courts will be the ultimate arbiters of the tax issue. But that won’t be the end of JPMorgan’s legal engagement over its actions preceding and during the crash. At least nine other government investigations are ongoing and the deal did not give it immunity from criminal charges at a later date.
The JPMorgan settlement moves the floor for future deals with other financial institutions from the millions to the billions and is the most significant accomplishment of a task force formed by the Obama administration in January 2012, which includes the Justice Department, the U.S. Securities and Exchange Commission (SEC) and the New York State Attorney General.
U.S. Attorney General Eric Holder said it won’t be the last. “The size and scope of this resolution should send a clear signal that the Justice Department's financial fraud investigations are far from over.”
Stockholders liked the deal. JPMorgan shares rose 41 cents, or 0.7%, to $56.15 on Tuesday.