A crucial piece of context went missing in coverage of the recent news that JP Morgan settled with the federal government for $13 billion over mortgage misconduct mostly by institutions it acquired. That context: Just how much is $13 billion in penalties compared with the benefits to the bank from that conduct?
Bloomberg told us, via the Los Angeles Times, how painful the settlement was for the company, according to Chairman and CEO Jamie Dimon.
DealBook, The New York Times‘ soft-on-Wall-Street section, offered up a piece headlined, “Considering the Fairness of JP Morgan’s Deal,” that in classic DealBook style looked at the issue from the perspective of the bank, not the taxpayers who had to prop it up.
The Washington Post‘s usually informative Wonk Blog ran a generally informative piece, “Everything you need to know about JPMorgan’s $13 billion settlement,” by Neil Irwin. Irwin wrote that “the bank earned $32 billion in operating income in 2012, so the settlement would be equivalent to about five months’ worth of income for the company.”
Problem is, the misconduct covered a much longer period than 2012, so a one-year comparison makes it look like the bank was hit harder than if you look at profits over the last eight years.
Enter David Sirota, a liberal columnist in Colorado, who looked in vain in the major newspapers for thorough analysis of penalty versus profits. He said it was out of frustration that he wrote a column titled, “Huge Number, Tiny Punishment,” published Monday at the new website NSFWCorp.com (Not Safe for Work).
“That’s why I wrote the column,” Sirota told me, “because I expected to see the $13 billion put in context and I didn’t see it anywhere.”
Sirota compared the penalty to a speeding ticket for an average Joe, arguing it was grossly inadequate, which is, of course, a matter of opinion rather than fact.
The $13 billion is “only a mere 2 percent of the $652 billion JP Morgan Chase raked in since it started committing the alleged crimes in question,” Sirota wrote in his sometimes hyperventilated style.
That’s the wrong measure. Net pre-tax income is what I would use, and that comes to $154 billion for the years Sirota wrote about, 2005 through 2012. That makes the penalty 8.4 percent of pre-tax profits since 2005 or one dollar in 12. That does seem more than a speeding ticket, but arguably not enough to deter misconduct in the future.
Columnist Michael Hiltzik of the Los Angeles Times also provided valuable insight, noting that the size of the fine is not the most important part of the story. Hiltzik wrote that the settlement:
doesn’t resolve the ongoing federal criminal investigations of the bank’s conduct in the residential mortgage securities business during the run-up to the 2008 financial crisis. That investigation is being handled by federal prosecutors in Sacramento.
Next time the government announces a penalty for a business, reporters should put it in context. One good measure would be penalty (after tax if it is deductible as a business expense) divided by net pre-tax income for the years in question. Here is another measure reporters could have used: Calculate the dividends paid since 2005 against the fine. A hint on how informing that would be: the $13 billion is roughly what JP Morgan paid in dividends on its nearly 3.8 billion shares in the last five quarters, while the period Sirota decided is relevant was 32 quarters long.
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David Cay Johnston covers fiscal and budget matters for CJR’s United States Project. He is a reporter with 46 years of experience, including 13 at The New York Times; a columnist for Tax Analysts; teaches tax and regulatory law at Syracuse University Law School; and is president of Investigative Reporters & Editors (IRE). Follow him on Twitter @DavidCayJ.