The Department of Justice decided to go after Wall Street investment bank J.P. Morgan over the firm’s role in America’s recent economic woes. The result last week was a $13 billion settlement, which is the biggest shakedown of a single company in American history.
Ostensibly, J.P. Morgan is being punished for misleading claims it made while peddling residential mortgage-backed securities, better known as the “toxic assets” that tanked the stock market and destroyed trillions in wealth. The firm is hardly without blame in the financial collapse, but this settlement seems to be more about politics and money than justice. New York state Attorney General Eric Schneiderman said it best: “There are more big paydays to come.”
Politicians prefer to blame faceless villains in pinstripe suits for the implosion of the housing market in 2008; otherwise, officials might have to own up to the policies that they put in place that encouraged the bad behavior. A few years ago, it was the government’s imperative to turn as many Americans as possible into homeowners, regardless of whether they could afford to make the monthly payments. Coming out of the dot-com market crash at the turn of the century, some economists insisted the mortgage boom would spur recovery. One of the cheerleaders was New York Times columnist Paul Krugman, who argued, “To fight this recession the Fed needs … soaring household spending to offset moribund business investment … . Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” That he did.
Mr. Greenspan kept interest rates artificially low. Government showered the housing market with subsidies, offered tax incentives and mandated banking policies that forced financial institutions to give a certain amount of loans to people who could never pay them back. The scheme even had bipartisan appeal. Democrats were eager to get their constituents out of apartments and into homes, and Republicans argued the quickest way to turn a Democrat into a Republican was to make him start paying property taxes. Realtors, bankers and mortgages brokers all prospered during the boom, as did the politicians who bragged about the strength of the economy.
When the market intervention backfired, government officials washed their hands. Congress, Fannie Mae, Freddie Mac, the Department of Housing and Urban Development and the Federal Reserve each pointed the finger of blame toward Wall Street.
J.P. Morgan makes the perfect scapegoat and provides a ready excuse to redistribute wealth to the administration’s best friends. The biggest chunk of loot, $613 million, goes to New York state, while California will cash a check for $299 million. Joe Biden’s Delaware gets $19 million; Mr. Obama’s state of Illinois takes $100 million. Massachusetts will take $34 million. The jackpot also contains several earmarks, including $4 billion for “consumer relief” and “anti-blight” programs. Community organizers for a group called NeighborWorks will fill their pockets. Presents will be doled out to some of Mr. Obama’s favorite unions, including $75 million for the Illinois Teachers’ Retirement System, $16 million for the Illinois State Universities Retirement System, and $11 million for the Illinois State Board of Investment.
The giveaway of cash to friends of the White House puts the motives underlying the settlement in question. Instead of serving as a deterrent to future malefactors, this settlement enriches the individuals most responsible for tanking the economy.