We live in an economy so through the looking glass that bad news is good news. So what constitutes actual bad news? Apparently, no news is potentially the worst news, although it is still shrugged off as nothing. So perhaps it’s really bad news after all, making it good news. It’s so hard to tell.
All we’re missing is a Mad Hatter. Everyone, change places!
The lack of news at hand is the lawsuit against JP Morgan filed by US Attorney Eric Holder alleging a violation of the Martin Act. That’s a somewhat obscure statute from 1921 that makes interesting lawsuits out of small violations. The reason this isn’t news is that it wasn’t even JP Morgan, as we know them, that has a problem – it’s from the firm of Bear, Stearns that they purchased in 2008 on its way underwater. And it involves mortgage problems that the industry supposedly corrected long ago. The White Rabbit is a solid four years late.
Or – is it really news after all? They picked up a lot of interesting stuff along the way, including some tidbits from Chase Manhattan Bank (aka Chased MadHatter) so is there more to come?
The actual news is indeed tame. After the kind of thorough review that apparently takes four years, Holder apparently decided it was time to act. No one is alleging deliberate fraud in writing bad mortgages, only that the apparent risk was under-stated when they were bundled together into mortgage backed securities (MBS) and sold onto the open market.
The tool they are using is the Martin Act, which states that:
It shall be illegal … to use or employ any of the following acts or practices:
… (b) Any promise or representation as to the future which is beyond reasonable expectation or unwarranted by existing circumstances;
In other words, if you sell bad mortgages as good, you violated the law – even without an “intent” to defraud. Simple, clean and to the point. Elliot Spitzer used this when he was the AG of NY to gather a lot of information in the “discovery” phase that started to look bad – and the banks he was targeted settled for a few billion in fines. It was a good day all around.
We’ll leave aside what happened to Spitzer, but an Alice joke would be pretty good about now.
When the use of the Martin Act against JP Morgan was announced, no one took it very seriously. This is very old news. But you never know what a curious AG can come up with when they start poking around the rabbit hole.
What Holder has promised is that there will be more suits of this kind. What we can say for sure is that the weapon of choice has been unleashed, and the Vorpal blade will go snicker-snack! Or so any of us can hope.
This is where we go deep into speculation as to the nature of the looking-glass world, and I hope you can join me on this journey. What always gets Wall Street are the things that everyone is sure are unimportant are the things that they let slide by. The more Wall Street shrugs off the AG’s action, the more I am convinced that this might be the path to something much bigger.
How is that? It’s no secret that the Obama administration wants to regulate Wall Street much more heavily than they are now. The Dodd-Frank bill that they did get through ahead of the 2010 loss of the House has proved to be a non-event, largely. Given the politics of the situation, there is little choice other than a civil lawsuit route. This first round has been promised to be nothing more than a first round, and what’s to come is far from obvious.
Off with their heads!
Will this be the lack of news that turns into genuinely bad news, as distinct from bad news itself? Time will tell, as always. What little we can be sure of is that there have been far, far worse things run through JP Morgan than what they picked up along the way from Bear, Stearns. This was probably only the most obvious thing to start with. Sometimes, the best way to determine the future of Wall Street is to turn off the teevee and stare through the looking glass.