Tags: JPMorgan | Parsons | banks | settlement

Former BofA Exec: JPMorgan Penalties Will Make Banks Reluctant to Help in Crises

By Dan Weil   |  

The government's reported decision to penalize JPMorgan Chase for the actions of Bear Stearns in the mortgage crisis will make healthy banks think twice about helping the government out in times of crisis, says Richard Parsons, former executive vice president at Bank of America.

He notes in The Wall Street Journal that it was the government that pushed JPMorgan to acquire Bear Stearns when it was failing in 2008.

"The FDIC has had a long-standing practice of turning to strong, bigger banks to step in when their weaker, smaller sisters failed or hemorrhaged capital," writes Parsons, author of the book "Broke: America's Banking System."

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In the 2008 financial crisis, federal bank supervisors asked JPMorgan Chase to help out by purchasing Washington Mutual and Bear Stearns and asked for Well Fargo to assist by buying Wachovia.

"If it is true that JPMorgan Chase must pay penalties for mistakes made by Bear Stearns, . . . then it is likely federal policymakers have actually increased systemic risk to the financial system," Parsons writes.

"Once the government proves itself to be an unreliable 'partner' in resolving failed institutions, it will find fewer banks willing to step in next time there is systemic risk to the banking system," he adds.

JPMorgan has reached a tentative $13 billion deal with the Justice Department to end investigations into its mortgage bond sales. But some say the fact that the criminal inquiry of the bank wasn't resolved represents a major problem.

"To not get the waiver from criminal prosecution is not good," Nancy Bush, an independent bank analyst, told Bloomberg.

"What we're looking for in a settlement of this size is certainty from things like the criminal prosecution of a company."

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The government's reported decision to penalize JPMorgan Chase for the actions of Bear Stearns in the mortgage crisis will make healthy banks think twice about helping the government out in times of crisis, says Richard Parsons, former executive vice president at Bank of America.
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