Sleep With The Dogs, Wake Up With Fleas

JP Morgan finds itself under the government microscope for having heartlessly... cooperated with the government four years ago

The U.S. Department of Justice and New York Attorney General Eric Schneiderman teamed up last week to sue J.P. Morgan in a headline-grabbing case alleging the fraudulent sale of mortgage-backed securities.

One notable detail: J.P. Morgan didn't sell the securities. The seller was Bear Stearns—yes, the same Bear Stearns that the government persuaded Morgan to buy in 2008. And, yes, the same government that is now participating in the lawsuit against Morgan to answer for stuff Bear did before the government got Morgan to buy it....

As for the federal government's role, it's helpful to recall some recent history: In the mid-2000s, Bear Stearns became—outside of Fannie Mae and Freddie Mac—perhaps the most reckless financial firm in the housing market. Bear was the smallest of the major Wall Street investment banks. But instead of allowing market punishment for Bear and its creditors when it was headed to bankruptcy, the feds decided the country could not survive a Bear failure. So they orchestrated a sale to J.P. Morgan and provided $29 billion in taxpayer financing to make it happen.

The principal author of the Bear deal was Timothy Geithner, who was then the president of the Federal Reserve Bank of New York and is now the Secretary of the Treasury. Until this week, we didn't think the Bear intervention could look any worse.

Somewhere there was a legal department fail here - I can't ever, ever imagine buying a company with Bear's reputation that was sinking into bankruptcy without doing either via an asset sale or letting the mess wash through Chapter 7 so there could be an old bank / new bank split.  But Bank of America made exactly the same mistake at roughly the same time with Countrywide, so it must have appeared at the time that the government largess here (or the government pressure) was too much to ignore.

  • SamWah

    I'll take Gov't Pressure for $2000, Alex.

  • AnInquirer

    This arbitrary and capricious use of government power may be causing the current economic malaise more than any other cause. If you cannot trust the government, is it a good idea to take a risk-filled proposition? Those risk-filled proposition is how the economy grows and jobs are created, but three times in American history, potential job creators did not trust government, and in all those three situations, we have had protracted economic malaise.

  • mesocyclone

    I'll second the government pressure hypothesis

  • Wintercow20

    There is an interesting environmental parallel here. New property owners are typically supposed to assume the responsibility for chemical/toxic damages on land they purchase. Despite this legal provision it is not uncommon to see the government look back to prior owners for damage abatement even if that prior ownership disclosed the chemical release.

    The sad history of Love Canal is a case in point. Hooker Chemical was VERY upfront about what it was putting in the ground, even putting language into the sale deed to Niagara Falls county, about the buyer being very aware of the harmful chemicals that were disposed on site. Never matter - Hooker still comes out as the villain in this case. It's the JP Morgan situation in reverse.