Potential Criminal Charges Loom, but JPMorgan May Remain Too Big to Jail

The nation's largest bank will pay $13 billion but still faces criminal charges.

The head office of JPMorgan Chase rises over Park Avenue in midtown Manhattan on July 13, 2012 in New York City.
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Even now, after JPMorgan Chase and the Department of Justice have settled civil charges over the handling of subprime mortgages prior to the financial crisis, the question of criminal charges still looms. Still, some experts believe it unlikely that the nation's largest bank will face those charges.

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The $13 billion settlement announced Tuesday afternoon constitutes the largest U.S. government settlement, the Justice Department said in a press release. As part of the settlement, JPMorgan will acknowledge wrongdoing, saying that it "made serious misrepresentations to the public - including the investing public" about the quality of mortgage-backed securities sold prior to the crisis. The bank will provide monetary relief to troubled homeowners. But in addition, the department noted that the settlement "does not release individuals from civil charges, nor does it release JPMorgan or any individuals from potential criminal prosecution."

In a statement, JPMorgan Chase said it "continues to cooperate with the ongoing criminal investigation." The bank did not respond immediately to U.S. News request for comment on this article.

Still, JPMorgan will not likely see criminal penalties, say several legal experts, and it may be in part due to the simple fact that it is a large bank.

"Very few major banks have ever been convicted of a crime, but quite a few are prosecuted, and they tend to receive deferred or non-prosecution agreements," explains Brandon Garrett, professor of law at the University of Virginia who is currently working on a book about corporate prosecution entitled "Too Big to Jail." Those agreements are essentially settlements that avoid indictment or convictions, he explains.

"They don't want the bank to lose its banking license, or they don't want to hurt the bank's reputation so much that innocent shareholders would suffer," Garret explains. "And there's been some real criticism that some of those agreements look too lenient."

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One of the most notable examples of such agreements is HSBC, the London-based bank that, due to lax anti-money-laundering systems, allowed drug cartels to launder hundreds of millions of dollars. In a deferred prosecution agreement approved in July, the government levied a $1.9 billion fine upon the company, and the bank acknowledged wrongdoing but avoided prosecution. The Justice Department worried about the consequences of prosecuting a large bank, asking the Treasury Department to help it parse those consequences. The episode led many to ask whether large banks were not only too big to fail but "too big to indict."

Garrett believes the bank will not see criminal charges, and one former prosecutor agrees, saying the chances of the government following through with such a prosecution and attempting to shut down the bank's business are slim.

"I really do not think that's going to happen here," Jacob Frenkel told CNBC this week. "You're not going to have a situation at JPMorgan where you have a criminal indictment that ends up turning the lobby of every JPMorgan office around the world into a state-of-the-art health club."

While the government may be loath to pursue criminal charges against financial services firms, it should be noted that it sometimes does crack down. Earlier this month, SAC Capital Advisors pleaded guilty in an insider trading case, paying $1.8 billion and closing down to outside investors.

As was argued during bank bailouts in the immediate aftermath of the financial crisis, one can make the case that not pursuing criminal charges against big banks constitutes a moral hazard in that it encourages bad behavior. Another former prosecutor says this argument is valid, making this a sticky situation from the government's point of view.

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"There are some who argue [big banks] are too big to fail. There are legitimate points there," says Douglas Burns, a former assistant U.S. attorney from the Eastern District of New York. "But then it's just as easy to say that rule is a moral hazard, a slippery slope."