(C) A Closer Look at JPMorgan’s $13 Billion Settlement

Banks are supposed to be a financial safe haven: a place to store money and valuables. People trust their banks to secure their checking and savings accounts, handle their loans, and offer reliable investment opportunities such as CDs.

That trust usually extends to the stock market too. With only a few notable exceptions – particularly the Great Depression and the much more recent financial crisis of 2008-2009 – investors have long-since believed that financial companies make sure-thing, too-big-to-fail portfolio picks.

Yes, they’ve been proven wrong multiple times over by the likes of Bear Stearns, Lehman Brothers, Wachovia, Fannie Mae and Freddie Mac. But then something happens to make investors forget those disappointed dreams, and they go right back to idolizing the financial market.

In March 2009, the factor that got them back in a trusting mood was the “leaked” memo from Citigroup Inc. (NYSE: C), which conveniently boasted about two months of pure profitability. That was enough for Wall Street to kiss and make up with the sector, setting the early stages of the bull run we currently enjoy.

Now 4 1/2 years later, JP Morgan Chase & Co. (NYSE: JPM) just settled the civil side of a suit filed against it by the U.S. government, which accused the financial institution of fraudulent mortgage securities practices… And its stock barely blinked.

If anything, it went up on the news, rising $0.18 by the closing bell. “Good. It’s over,” the market seemed to say, as if paying out $13 billion in damages was no big deal.

Investors might want to take a closer look at that agreement though. Because not only was it the largest such settlement reached by a single U.S. company…

It’s also likely to herald some deeply dampening effects on JPMorgan… and the rest of the financial sector as well.

U.S. Government Puts Too Much Blame on Banks

Chris Whalen, executive vice president at Carrington Holdings, says there’s much more to the story.

It’s not just about one lawsuit. “[T]he operating environment for the banks is changing a lot” in general, he points out. A conclusion may have been reached in the JPMorgan example, but there’s a much bigger sequel waiting to play out.

Despite its own heavy hand in manipulating the housing sector – actions that created multiple, far-reaching and painfully popping bubbles – the U.S. government is entirely blaming financial companies for last decade’s banking crisis. In so doing, it’s putting its money where its mouth is and tightening regulations on the sector.

In theory, that sounds like a good idea. After all, if banks are kept in better check, they won’t be able to wreak havoc on the country, offering loans to people who have no business applying, much less getting approved.

But again, there are two irresponsible parties here. And the U.S. government isn’t known for its restraint… or its intelligence. So it’s already going overboard reining financials in, and it’s going to end up damaging far more than big banks in the process.

Limited Banks Mean Limited… Everything

Earlier this year, the U.S. government’s Consumer Financial Protection Bureau unveiled strict rules for the financial sector that seemed to give consumers a whole lot more leeway.

As the Financial Times reported in January, the “mandates will increase protections for struggling borrowers… For example, servicers will not be allowed to formally begin the legal process of repossessing property until a borrower is more than 120 days delinquent.”

Starting in January 2014, banks will have to support nonpaying customers for a full three months before they can start the equally costly business of taking back what they legally own. Add to that the very real threat of continuing fiscal persecution from federal prosecutors, and you’re likely to see the exact opposite problem we had going into 2008…

In an effort to save themselves, mortgage lenders will start rejecting applicants in droves, thereby hurting their short- and mid-term bottom lines, the housing market and much, much more. The aforementioned Whalen says economic growth and job creation both hang in the balance as well.

None of this is to say that financials are headed for another crash. They’re probably not any time soon.

But don’t expect ever-rising results from them either. Under the current and continuing government crackdown, banks are set to suffer and their share prices will languish as a result.

Once the new rules kick in, they’re not going to be worth nearly as much as investors trust they are.

2014 is not going to be a good year for this sector.


View original at: Investment U

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