Dawsey: Can Detroit Trust JPMorgan Chase, Which Sent It Into Crisis?
May 23rd, 2014, 2:23 PM
Can the folks who helped toss Detroit into financial crisis really be counted on to help pull the city out?
That’s a question worth asking in the wake of the announcement earlier this week that JPMorgan Chase would invest $100 million into the city over five years with loans and grants. While the usual assortment of political hacks, media suck-ups and corporate suits trip over themselves to applaud JPMorgan Chase and CEO Jamie Dimon for the gesture, rank-and-file Detroiters would be well-served to take in the news with more than a few grains of salt.
Remember, Chase Bank was among the lenders that knowingly pumped billions in defective mortgages into the economy between 2005 and 2008, helping lead to the collapse of the housing market and wreaking broad financial havoc among vulnerable homes in cities across the country.
Nowhere was that impact felt more than in Detroit. According to one report, Detroit lost $1.3 billion in wealth to the mortgage crisis in 2012 alone. The impact on blacks and other people of color was particularly brutal. In predominantly black and brown Detroit ZIP codes, households lost an average of $4,500 in wealth 2012. White households lost an average of $2,800 that same year.
Detroit homes that once sold for $50,000 and suddenly lost more than 90 percent of their value, selling for as little as $4,000. Savings were wiped out. Families unraveled. Far from being merely deferred, many dreams were destroyed outright.
A $13 Billion Settlement
Last year, JPMorgan Chase negotiated a $13 billion settlement with regulators for its role in the shady mortgage deals. It was the largest civil fine ever imposed on a single company and more than three times larger than the previous record of $4 billion.
As if that weren’t enough, the mega-bank was also fined nearly $2 billion earlier this year for turning a blind eye to the long-running investment scam run by now-jailed financial advisor Bernie Madoff. According to prosecutors, who were considering criminal charges in the case, “the Madoff Ponzi scheme was conducted almost exclusively” through JPMorgan accounts.
Some observers, such as reporter Matt Taibbi, who covered the financial crisis for Rolling Stone magazine, saw little difference between Madoff’s crimes and the predations of JPMorgan Chase and its affiliates Washington Mutual and Bear Stearns. Taibbi wrote:
Madoff's operational fiction was his own personality. He used his charm and his lifestyle and his social status to con rich individuals into ponying up money into an essentially nonexistent investment scheme.
In the cases of both WaMu and especially Bear, the operating fictions were broad, carefully-crafted infrastructures of bogus guarantees, flatlined due diligence mechanisms, corrupted ratings agencies and other types of legal chicanery. These fake guarantees and assurances misled investors about they were buying. Most thought they were investing in home mortgages. What they were actually investing in was a flow of cash from new investors that banks like Bear and WaMu were pushing into a rapidly-overheating speculative bubble.
These banks created huge masses of mortgage securities they knew to be highly risky and/or fraudulent. At Bear, one deal manager jokingly nicknamed one pool of mortgages, SACO-2006-08, the "SACK OF SHIT" deal. In another case, Bear's securitization company, EMC, obtained a pool of mortgages from a sketchy mortgage originator called AHM, and found out that as much as 60 percent of the batch was delinquent.
Yet they continued to buy these mortgages and throw them into the great hamburger-machine, turning them into securities that would in turn be bought by everyone from pension funds to Fannie and Freddie. And then they pushed sales even harder, relying upon the influx of new buyers of these securities to keep the value of the old securities stable.
This is exactly what Bernie Madoff did, it's what Charles Ponzi did, and it's what Allen Stanford did – using cash from new investors to pay off the old investors. The supermarket-bank version of this game was just more elaborate, involved more moving parts and threatened indescribably greater damage.
CEO Gets a Huge Raise
So what was JPMorgan Chase’s response to the fines, to the illegal and unethical financial transactions, to the role its leadership played in wiping out billions of dollars in savings from American households?
In January, the bank’s board of directors gave Dimon—a man who earned $9,615 an hour last year while his company barely skirted criminal prosecution—a 74 percent pay raise. This after the company denied raises to most of its workers in 2013 and laid off more than 7,500 employees.
That is, of course, a far cry from the criminal prosecution that others were insisting Dimon deserves.
Now, a CEO whom many believe should have traded in his designer suits for prison orange hopes to convince Detroiters that, after sending thousands of them into bankruptcy and/or home foreclosure, his bank wants to make things better. You’d think that this would raise at least a modicum of skepticism here, but local media has become so accustomed to serving as handmaidens to the state’s rich and powerful that Dimon’s announcement was met with little more than the equivalent of polite applause.
Fortunately, despite all the local cheerleading in headlines and newscasts, some media figures offer at least a measure of doubt:
- NBC’s Matt Lauer drops his courtier role for a moment to ask whether JPMorgan’s investment is anything more than a PR stunt.
- Salon wonders whether the $100 million is a Trojan horse concealing an initiative to privatize more municipal assets.
Dimon concedes that the deal isn’t an act of charity, but rather a extension of the bank’s commitment to “develop communities around the world.” He told Lauer that revitalizing Detroit “would be a great example, shining example, of what can be done.” (He didn’t say whether it would be done to us or for us.)
Nobody’s saying the city should simply turn down $100 million in loans and grants, but we damn sure had better scrutinize the strings that come attached. History shows that JPMorgan Chase has done far more to compound Detroit’s recent financial woes than to alleviate them. And Dimon’s own history suggests he’s more sociopath than Samaritain.
So even as the mayor and governor and other suits hyperventilate over Dimon’s money and the prospect of “what can be done,” working-class Detroiters still trying to recover from economic depression, depleted savings and home foreclosures might be better off wondering whether JPMorgan Chase has done enough already.