Bottom Line: JPMorgan fine will discourage future rescues

Tim Wallace
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PUNISHING JP Morgan for the sins of the past might make regulators feel like they are cracking down on bad behaviour and getting tough on banks – but they risk storing up problems for the next crisis.

Most of JP Morgan’s mortgage-related problems come from institutions it saved in the financial crisis, at the government’s urging.

Walloping the bank with record fines will not encourage strong banks to bail out weaker rivals next time the system is in trouble.

Of course JP Morgan knew it would have to pay big time to clean up the lenders, but surely the scale of punishment is unexpected.

It snapped up Bear Stearns for just $10 a share in 2008, in what looked like a great deal – the stock had been worth $170 a year earlier.

The same applies to the purchase of Washington Mutual. The mutual’s shareholders lost out when JP Morgan bought it from receivership, again with official encouragement.

JP Morgan seems to have thought regulators would thank it for the rescues, while it took the cost of the bad deals made by the broken institutions and moved on.

But it has not turned out that way. Jamie Dimon seems shocked at the $13bn settlement charge this week. The bank says more than 80 per cent of the mortgage-backed security deal losses come from Bear Stearns and Washington Mutual, not JP Morgan.

That can only make strong banks more cautious about rescuing their rivals the next time a financial crisis comes along.

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