Tag Archives: Wall Street

Revenge on the Street – Deutsche Bank Fined for Mortgage Backed Securities

Another victim on Wall Street and this time its the German Deutsche Bank. On December 21st, in an almost identical case to JP Morgan, Deutsche Bank agreed to pay $1.9 billion to settle claims that it had misled Fannie Mae and Freddie Mac regarding the quality of the loans it had used to bundle into mortgage backed securities prior to the financial crisis of 2008. Here is a panel on Bloomberg discussing this fine in more detail.

The difference between this case and the JP Morgan fine I had discussed in an earlier post is that whereas JP Morgan was fined by the Department of Justice, Deutsche Bank was fined by the Federal Housing Finance Agency (FHFA). Since September of 2011, the FHFA has been on a suing spree and alleged 18 banks and financial institutions with committing the same wrongdoings as Deutsche Bank; misleading Fannie Mae and Freddie Mac regarding the creditworthiness of the mortgages it had sold to them.

Now I’m sure there are some of you out there who have no clue what Fannie Mae and Freddie Mac is. I’ll admit, when I first heard about them, I thought they were a brand of Mac and Cheese. You know I love my explanatory videos for you guys. So before we continue, here is a brief breakdown of Fannie Mae and Freddie Mac.

Of the 18 institutions that the FHFA sued, so far it has settled with only 6 of them. But. as stated in the Bloomberg video, more and more of these institutions are now looking to pay their fines, clear their names and look to the future without any worries for the past. That is exactly what was being discussed in the Bloomberg panel and what Jurgen Fitschen and Anshu Jain, Co-Chief Executive Officers of Deutsche Bank discussed in their recent statement where they said:

“Today’s agreement is another step in our efforts to resolve the Bank’s legacy issues, and we intend to make further progress in this regard throughout 2014”

Call me crazy, but I believe that Deutsche Bank were relieved to have put this whole deal behind them for such a meager amount compared to the whopping $13 billion that JP Morgan had to pay to the Department of Justice. In fact, maybe a bottle of Jagermeister was opened in Frankfurt that night.

Of course, in addition to the cases regarding mortgage backed securities in 2008, there is also the cases surrounding the LIBOR scandal, which I will get to in another post. If one thing is for certain, it is that with 12 institutions still being sued by the FHFA and with more and more of them looking erase their past and approach the future with a clean slate, expect more of these settlements to be in the headlines in the upcoming months.

“In the subprime mortgage industry, bankers handed out iffy loans like candy at a parade because such loans meant revenue and, hence, bonuses for executives in the here-and-now.”
-Thomas Frank


Revenge on the Street

Lately, I had been having writers block and had not been able to write a new article. But after a new interesting breaking story, a catchy title, and some inspirational electronic music, lets get rolling.

Speaking of rolling, heads are rolling on Wall Street these days; mainly, JP Morgan’s head. What is JP Morgan? Well its only the eight largest bank in the world and the largest bank in the United States based on assets. Originally, on August 13, it was announced that JP Morgan was being investigated  by the United States Department of Justice for its sale of mortgage backed securities in the period leading up to the 2008 financial crisis. The Department of Justice claimed that prior to the crisis, JP Morgan had misrepresented the quality of mortgages it was packaging into assets and selling to investors. More specifically, it is claimed that JP Morgan had misrepresented subprime and risky mortgages to investors as safe and sound assets. However, as we all painfully discovered in 2008, many mortgages across the United States were lent out to irresponsible and unworthy borrowers. When they defaulted on their mortgages, the mortgage backed securities collapsed and the price of houses plummeted. By the way, before we move on, if any of that jargon regarding the financial crisis was confusing to you, check out this EXCELLENT graphic explanation of the crisis.

After weeks of negotiations between JP Morgan CEO Jamie Dimon and Attorney General Eric Holder, Dimon finally settled to pay $13 billion of fines to the Department of Justice regarding the investigation. Even though many people assume that Dimon agreed to settle because he wanted to avoid future legal costs in the case of a potential civil suit, I like to believe that Eric Holder put on a Batman costume, and gave Dimon a beatdown in a poorly lit room. Rumor has it that Dimon was heard yelling the following words:

“If you’re a financial institution threatened with criminal prosecution, you have no ability to negotiate…you cannot win..you have a gun to your head”, said Warren Buffet, a couple a days ago. So maybe my theory on how the negotiation went down might not be so far-fetched.

So where will the $13 billion go? $9 billion of it will go to the government to help repay the taxpayers for the $188 billion bailout of Fannie Mae and Freddie Mac, two large semi-private mortgage issuers. They too had bought mortgage backed securities from banks like JP Morgan prior to 2008, and once homeowners defaulted on their mortgages, they too went under. The other $4 billion will go directly to help struggling homeowners pay their outstanding mortgages.

This will surely eat a large chunk out of JP Morgan’s profits for the next quarter. $13 billion is no small amount. According to a study by Bloomberg, JP Morgan’s $13 billion fine is bigger than Southwest Airlines’ market value, Google’s revenue for the third quarter, and JP Morgan’s Consumer Banking revenue for the third quarter.

size of fine

Is JP Morgan hurt? Definitely. Is JP Morgan done for? Definitely not. It still is and will remain to be, a very profitable bank. In 2012, JP Morgan recorded profits totaling to a whopping $32 billion. That’s profits, not revenue! It is true that compared to other recent legal fines that financial institutions have faced, this one is much larger.


But as the Joker said in the Dark Knight: “Its not about the money. Its about sending a message.”

(Am I on fire with the Dark Knight references or what.)

What makes this case so significant is what it symbolizes, and that is the revenge of Main Street. By that, I mean that since the crash of 2008, not many banks or financial institutions had been prosecuted regarding the shady financial voodoo that went down prior to the economic collapse. Many people who had been severely effected by the crisis are still furious to this day that the banks are not being punished for their wrongdoings. And who can blame them? Because of the games played by bankers, lives across the globe were changed for the worse.

However, just like many things in life, there is no black and white. There are no perfect good guys or pure bad guys. Everything is somewhere in the middle. To understand what I mean, we have to turn around and look at the government. Firstly, it is crucial to note that the sales of mortgage backed securities at JP Morgan were occurring mainly in 2 subsidiaries, Washington Mutual, which was a bank that was known for issuing mortgages, and Bear Sterns, an investment bank. Prior to the financial crisis, these entities were independent companies. However, they both went bankrupt after the housing bubble collapsed. After their bankruptcy, the government persuaded JP Morgan to buy these institutions and save them from insolvency. So one could very easily make the argument that the US government is now trying to punish JP Morgan for owning the very entities that it made it purchase 5 years ago in order to save the United States from utter financial meltdown.

Secondly, why is it that the US government waited 5 years to prosecute JP Morgan? Why not act shortly after the crime was committed? The Department of Justice will claim that it takes a very long period of time to truly crack financial cases. Years of transactions must be analyzed, accounts dating back many years must be studied, and a definitive crime must be found. However, the more likely reason is that the government didn’t want to drive troubled banks off the cliff in 2008 by bringing down legal cases on them. Thus, they decided to look away from their wrongdoings for many years and only started to take them seriously once the economy picked up. Again, the government’s actions fall into a certain gray area. They ignored a crime for several years only to pick it up again. Doesn’t look like an example of pure good will does it?

Many parts of this settlement deal have not yet been finalized. We should receive more information regarding the deals in the following weeks. Until then, enjoy the song that Jamie Dimon has been listening to the most these past several weeks.

This country is a lot better off because Jamie Dimon has been running JP Morgan
-Warren Buffett