The $13 billion settlement over bad mortgage lending practices by JPMorgan Chase is a big deal, and Tony West was a key figure making it happen. The associate attorney general at the Justice Department played a lead role in pulling together the multitiered agreement that involved four federal agencies, five state attorneys general and one ginormous bank.
To recap: JPMorgan, after months of tense negotiations, agreed Tuesday to the largest penalty ever paid by a single company to resolve a myriad of government probes into its sale of bad mortgages securities. The investigation arose from the work of President Obama' financial fraud task force, a collaboration of state and federal prosecutors. Besides scoring the whopping fine, West and his team carved out billions of dollars to help struggling homeowners and pissed-off investors. And Justice did not back down on its criminal investigation into the bank's activity.
In an interview, West offered some insight into how the settlement came to be and what it may mean for future settlements. An edited transcript of his remarks follows.
Danielle Douglas: What was your strategy going into the JPMorgan negotiations?
Tony West: We wanted to make sure that those who were responsible for conduct that contributed to the worst crisis since the Great Depression accounted for their actions. We wanted to be able to secure an acknowledgment of what happened by JPMorgan through a factual statement. We also wanted to make sure that there was a component of this that allowed us to bring some much needed relief to main street, which had suffered as a result of this conduct.
For us, the statement of facts is as important as the money. It's important for these institutions to acknowledge the behavior they engaged in because that type of public acknowledgment is important to deterrence.
DD: Does a statement of facts equal an admission of wrongdoing?
TW: It depends on what the facts say. I think people can quibble about individual words, but one of the things we are resolute about is there has to be an acknowledgment of what happened. And what happened here is that there were risky home loans that were packaged up into securities. Even though JPMorgan had information clearly telling them that these loans were risky and did not meet minimum guidelines, they packaged them up into securities and sold them to investors without disclosing the poor quality of the loans.
DD: Is the statement of facts a road map for the criminal investigation?
TW: I don't know if it's a road map as much as it's an acknowledgment of what occurred.
DD: Could the settlement be used as a template for other agreements?
I think so. Where the Department of Justice, in leading these negotiations, can add value, that value will not just be in penalty -- it will have value in that way because that's the accountability part -- but also in adding value for the American people. And that's the consumer relief portion of this. I think we can expect to see as we go forward more in that regard.
DD: How did you arrive at the $13 billion figure? Is there some significance in the amount being that large?
TW: A lot of this is based on losses that we calculate, and there are different models to calculate those losses. Part of it depends upon losses that were suffered by participants of the global settlement -- investors, pension funds, retirement funds and the like.
A part of it is calculated on what the FIRREA penalty or the civil penalty would be. (The Financial Institutions Reform, Recovery, and Enforcement Act is a powerful 1980s-era law with a low burden of proof, strong subpoena power and the potential for explosive fines.) In this case, we secured the largest penalty of its kind in history.
And then part of it looks at other types of harm that can be remediated by JPMorgan, what is feasible, what JPMorgan is capable of doing and should be doing to help bring some relief based on the conduct that it engaged in.
DD: Talk to me about the significance of the use of FIRREA in the JPMorgan case.
TW: It is very significant. What you've seen from the Department of Justice in the last year really is using FIRREA to go after some of the most grievous financial fraud that exists. These cases are difficult to make because we are dealing with very complex processes that are not very transparent.
We're dealing with securities and financial instruments that are quite complicated. In some cases, even the people who were putting them together didn't fully understand what they were doing. But FIRREA gives us a tool to be able to go after this type of activity and hold institutions and individuals accountable for this type of conduct.
DD: How does the FIRREA law compare with other statutes that deal with fraud?
It's a very effective tool. You have to have a criminal predicate, so you're already looking for activity or behavior that sounds like fraud. One of the advantages we have is that criminal predicate and, indeed, violation under the statute need not be proven beyond a reasonable doubt, which is the criminal standard. It need only be by a preponderance of the evidence, which is the civil standard. So it allows us to get at activity which might be very difficult to reach through other statutes. It still allows us to hold institutions and individuals accountable in a significant way.
DD: Could the law be applied against companies in other industries outside of financial services?
It can, but one of the keys to making a FIRREA violation is the conduct has to effect federally insured financial institutions. But that is an element of the offense, one of the requirements. But if you meet that prerequisite, it need not be a bank.
A good example is earlier this year we brought a lawsuit against Standard & Poor's. S&P is not a bank. It's a credit rating agency. It's in a similar industry, of course, but it's a different type of company. We've alleged that the behavior they've engaged in was behavior that was fraudulent, where they said one thing but did another. Those misrepresentations had tremendous impacts on federally insured financial institutions. So we were able to use FIRREA against them.
DD: How large is the caseload for the task force right now?
We have a number of active matters that we are looking into and have been looking into for some time. Earlier this year, we announced a case with Bank of America. We also announced the resolution with JPMorgan. JPMorgan is not the first task force case; it won't be the last.
DD: Are any of those cases as complex as the JPMorgan case?
TW: Whenever you're dealing with this type of complicated financial behavior, and you're trying to look for evidence of fraud, it's going to complex. A lot of this is reverse engineering. You're looking at a process, and you're trying to work from the end backwards.
It requires you to really gain an understanding of how to put very complex financial instruments together. All of these cases have a degree of complexity to them. And they all have a similar pattern when it comes to packaging up these risky home loans into securities, marketing them to investors without disclosing the low quality of the securities. But each of them has their own unique permutations.
DD: Can you walk me through the process of how the work is divvied up within the task force? How do you decide which member works on what?
TW: What we try to do is identify either individual U.S. attorneys offices or individual lawyers that have expertise in this area or developing expertise in this area. One of the goals of the working group is to more greatly involve the U.S. attorneys because they're out there, they're prosecuting cases every day and have a very unique perspective on a lot of this.
A lot of it is who is interested and has done this type of work before [and] where do we find natural affinities and natural economies of scale because you have people working on similar cases.