Errors must be punished – but US justice is becoming arbitrary

 
Allister Heath

IMAGINE the following scenario. It’s 2024 and we are in the middle of a major banking crisis caused by a political implosion in China. Banks are going bust left, right and centre, with the regulators trying to offload failed institutions to stronger ones to contain the chaos. If you were in charge of one of the good banks, what would you do?

The only rational answer would be to run for the hills, and let the government deal with the mess on its own. That is one of the lessons of the crisis of 2008. Take JP Morgan: it took over the stricken Bear Stearns and Washington Mutual in deals brokered by the US authorities (and from which, of course, it hoped to benefit) – and now, five years later, it is being forced to pay a punitive $13bn fine and see its name dragged in the mud in large part for mistakes made by WaMu and Bear in 2005-07, well before JP Morgan bought them. Around 80 per cent of its fine is due to loans originating at those two failed firms.

Next time, JP Morgan, if it has any sense, will tell the Feds to get lost when they come knocking on its door asking it to bail out a dodgy competitor at a seemingly bargain-basement price. It’s far too risky to trust the political establishment not to subsequently bite the hand that feeds it – a lesson that Lloyds TSB learnt the hard way after it was encouraged to snap up HBOS at the height of the crisis.

The other major issue is that the fines being levied on JP Morgan appear almost random: it is hard to understand how they were worked out; in recent years, the workings of the US Justice system have started to become a drag on America’s competitiveness and attractiveness. Dick Bove of Rafferty Capital Markets, a top analyst, previously described the settlement as the “expropriation” of shareholder funds. The New York Post front page likened the original deal last month to a gunpoint robbery by “Uncle Scam” on its front page.

Of course, JP Morgan has made its fair share of mistakes. It made a fifth of the contentious loans itself. The London Whale episode was a major failure. As this newspaper has long argued, it is vitally important that financial firms sort themselves out; and the authorities should punish severely but fairly all instances of wrongdoing. Generally, across the industry, more bad bankers should be prosecuted and jailed if convicted. But this particular case leaves a bad taste in the mouth. Banks should pay when they are genuinely responsible, not be clobbered by rapacious, arbitrary regulators intent on extracting as much as possible from private shareholders, disregarding natural justice or property rights. There will be no winners from this sorry saga.

EDUCATIONAL BUBBLE
IT’S looking grim for Britain’s graduates, or at least those that are studying the wrong subjects at the wrong universities. No fewer than 38 per cent of adults of working age over the age of 21 are now graduates (ranging from 60 per cent in Inner London to 29 per cent in the north east), up from 17 per cent in 1992. Yet demand has not grown as quickly as supply; and 47 per cent of recent graduates work in jobs for which degrees are not necessary and which would have once gone to school-leavers, who are now being squeezed out even more badly.

Graduates remain far more likely to have a job and they still, on average, earn more. But media studies graduates earn just £21k, less than some categories of non-graduates, against £46k for medical graduates. Engineers also do well, followed (on substantially lower incomes) by graduates of the physical and environmental sciences, architecture, and maths and computer science. Graduates of Russell Group Universities earn £18.60 an hour, against £14.97 for other graduates. There is a bubble in parts of the higher education industry, and it is just a matter of time before it deflates.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath