It seems like as more stones are turned over and the aftermath of the global financial crisis keeps unravelling, there is an abundance of fraud and malpractices to be seen everywhere. Only last week, the rating agencies were dragged into the courts for mislabelling the securities they graded and now JP Morgan is being investigated by Department of Justice for the valuation of some of the mortgage products it created. The investigation has been launched against JP Morgan; however, the actual culprits are seen as Bear Stearns. It might be poetic justice that due to valuation done by some other company, they were near bankruptcy. It was only JP Morgan who stepped in and bought the company at a discounted rate. Now that JP Morgan brought Bear’s assets to its own books, they are being held accountable for the valuations.
The government’s stance is that JP Morgan should be answerable for the assets they brought into their books while the company feels that it is being targeted for no reason. The purchase of Bear was under stress conditions and the government encourage the acquisition in order to save the economy from further losses. Previously JP Morgan has pushed away any of suits filed against it and the same might happen again here. The charges are that Bear Stearns altered their valuation process in order to inflate the value of their assets and state them on their balance sheet which overstated its positions.
The investigation is in a series of initiatives that President Barack Obama announced in 2012 as the Residential Mortgage Backed Securities Fraud Working Group and it seems to be some sort of accountability that the financial institutions are held to. In addition to that, the group is having training sessions and recruiting of more personnel in order to throw a net over all the financial institutions and their activities.
The case pertains to Bear Stearns in 2006 where the company gave out loans and reviewed them from a third party reviewer. From the sample taken, one third had serious credit and compliance problem and the lax of standards shows an unfair advantage taken by Bear Stearns. The qualifications that had been placed on the loans were hidden and the financial statements were misrepresented from their true position. This investigation follows lawsuits that have been placed against JP Morgan for practises done by Bear Stearns already involving making bad loans and the securities it sold based on these loans.
To an outsider, this might seem like a witch hunt where JP is being targeted for someone else’s offence but at this point it might be something that is required. Till now, it is contended that financial institutions are already too big to fail and now even too big to jail. Based on these new realities, it should be realized that any punishment placed on these institutions will be a victory for the ones who support a more moral financial industry. JP Morgan was involved in the financial crisis as well as it had used these securities in their books as well. Maybe this will be a balancing act in the frame of the bigger picture.
In addition, there is a pursuit to game the system and then hide these practises as much as possible. So it is difficult to catch them. Even when they are caught, they use victimisation and loopholes to evade punishment and lastly, even if punished, it is just a harsh word compared to what the punishment should be. Maybe through these lawsuits and investigations, the institutions can be deterred from doing it next time.