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Wednesday, November 6, 2013

Smells like a witch hunt

SAC Capital, the hedge fund run by Steven A. Cohen, just settled with the government on Monday. The government was unable to obtain an indictment against Cohen himself, but the $1.8 billion dollar settlement seemed justified given that Cohen's fund has always had a bad smell about it. The extraordinary number of insider trading cases involving it did not seem coincidental.

The way that Eric Holder's Department of Justice is going after JP Morgan, though, seems almost personal.

The biggest fine being levied against the bank is for their role in the mortgage debacle. But the mortgage mess had many authors. Bill Clinton's Community Reinvestment Act pressured the banks to make riskier loans with smaller down payments to people with shakier credit. George W. Bush pushed further in the same direction by declaring in 2002 that he wanted more minority families living in their own homes. FANNIE MAE and FREDDIE MAC both insisted that the mortgages they bought include a higher percentage of minority owners than had been the case in the past. Individual mortgage brokers encouraged people to buy more house than they could afford. And speculators took advantage by buying irresponsibly, knowing they didn't have the resources to pay off their mortgages, but figuring that rising home values would bail them out.

So who is the government going after? JP Morgan. This seems particularly unfair given that most of the mortgages in question were originated by Washington Mutual and Bear Stearns before they were acquired by JP Morgan, and that the government pressured JP Morgan to buy those two entities at the height of the financial crisis.

The Department of Justice also insisted JP Morgan pay a fine for the bad trade engendered by the London Whale. They claimed that the controls JP Morgan had in place were not adequate, and that they didn't reveal the extent of the losses quickly enough. Wall Street banks do bad trades -- as well as good ones -- all the time; that's the nature of the game. And their controls are only as good as the people who oversee them. If every financial institution had to pay a penalty for every bad trade they did (as well as lose the money they lost on the trade), all would soon go out of business.

But it's only JP Morgan which is being prosecuted for this.

The Department of Justice is also looking into allegations that JP Morgan hired the sons and daughters of prominent Chinese politicians in order to gain business. Why not go after Goldman Sachs for the same thing? I've heard it's virtually impossible to get a job at the firm fresh out of college unless you have some sort of high-powered connection.

For that matter, why not go after Goldman for hiring influential former Fed governors? Why not go after lobbying firms in DC for hiring ex-politicians? Almost every major politician sells his connections in one way or another after leaving office.

Why not go after these other firms? Because they make nice with the current administration, and don't criticize them publicly.

Jamie Dimon's mistake was to speak out against Obama, and against Dodd-Frank. If he hadn't, this focus on JP Morgan would likely not have taken place.

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