A settlement arrived at by JPMorgan Chase, one of the world’s largest banks, with state and federal authorities in the U.S. over its role in selling mortgage-backed securities in 2008 has wide-ranging implications. Leading financial institutions on Wall Street and elsewhere in the developed world were complicit in selling securities based on home loans, many of them of dubious quality. These were bundled together through complex procedures and then parcelled out into marketable instruments. The complexity of these instruments was such that in many cases even the creators of these securitised paper were unaware of where the risks would lie. Rating agencies were also complicit in giving investment grade ratings to these securities which were at the heart of the financial crisis in 2008. Far from being confined to the U.S. housing sector, the crisis soon morphed into a global economic crisis of unprecedented dimensions, the consequences of which are still being felt. The JPMorgan case was the first to reach conclusion after a special task office was set up in 2012 by an administration constantly harangued for not holding Wall Street to account for the financial crisis. The settlement envisages a fine of $13 billion to be paid by JPMorgan, in return getting a reprieve from all civil proceedings, though not from criminal charges. The bank is also expected to acknowledge some wrongdoing, which might open up possibilities of private litigation.
Among the important messages that the settlement conveys is that even an institution of the size and stature of JPMorgan can be proceeded against. There have been serious debates among regulators over taking punitive action against banks that are “too big to fail”, on the ground that such action may lead to a general loss of confidence in the financial system. On the other hand, there is a view that the feeble punishment meted out so far will not be a deterrent against future transgressions. The JPMorgan settlement is expected to set a precedent for similar actions against big banks and rating agencies that are expected to follow. The fact that most of the irregularities occurred in the books of Bear Stearns and Washington Mutual, two troubled institutions that JPMorgan was nudged to take over by the authorities in 2008, has not been seen as a mitigating factor. For India, where there is more than a hint of throwing open the financial sector to foreign banks, there are lessons to be learnt. Despite their size and legacy, some of these iconic institutions have not acquitted themselves creditably in their own countries. Some of their practices — such as those that precipitated the 2008 crisis — must be strongly discouraged in their Indian operations.