Forgive us our debts, as we forgive our debtors.
— The Lord’s Prayer
Here are some of the good things JPMorgan has done in recent years. In 2012 it reduced the compensation of Jamie Dimon, its chairman, president and CEO from $23 million to $11.5 million. That was his punishment for all the bad things the bank acknowledged that it had been doing while under his supervision. The bank acknowledged its sins by paying almost $20 billion in fines and penalties. Included in the $20 billion was $13 billion it agreed to pay in November 2013 that was described in the Wall Street Journal as “the biggest combination of fines and damages extracted by the U.S. government in a civil settlement with any single company.”
For a bank the size of JPMorgan to pay $20 billion in fines as penance is a bit like the parishioner entering the confessional and seeking forgiveness from the supervisor of the man on the other side of the partition. It has no effect on his future conduct. Nonetheless, paying the fines was a good thing since each fine was an act of contrition and those acts are always welcomed by those sitting in judgment on bad actors. Here, however, are two bad things JPMorgan has been doing since leaving the federal government’s confessional at the end of 2013.
It increased Mr. Dimon’s compensation package by 74%, raising it to $20 million as a result of which Jamie’s compensation went from $31,506.84 per day to $54,794.52 per day. Since much of that is in restricted stock he cannot run out and spend it all. Here is why that was a bad thing for the bank to have done. It turns out that notwithstanding the $20 billion in penance paid, JPMorgan had discovered yet another way to make money at the expense of its customers. It did this by ignoring part of the bankruptcy laws.
Bankruptcy is designed to give the financially distressed a way of getting a fresh start. Subject to some exceptions, the debts of a person who takes bankruptcy are discharged by the court and the bankrupt person gets a fresh start. The Fair Credit Reporting Act requires credit bureaus to keep accurate information about individual’s credit information. The fact that an individual has taken bankruptcy can appear on a credit report for 10 years after the individual has received a discharge, but the discharged debts cannot be described as unpaid or past due. Creditors may not try to collect on discharged debts.
The bankruptcy law notwithstanding, some do. Jamie Dimon’s bank is one of them. Just as it bundled subprime mortgages it had issued and sold them to investors at great profit to itself, according to a report in the New York Times, JPMorgan and other banks have been selling debts discharged in bankruptcy to outside investors. Instead of showing that the debt of an individual to the bank has been discharged and is no longer collectible, the bank continues to described the debt as unpaid and that is how it appears on the borrower’s credit report. If the borrower tries to get credit following a bankruptcy and the credit report does not disclose that the debt cannot be collected, a discharged debtor may be unable to get a new loan or a job or be otherwise adversely affected. The bank, of course, makes money by selling the discharged debt to investors who are willing to take the chance that the debtor will continue to pay on the debt in order to get it removed from the credit report.
Judge Robert D. Drain, a bankruptcy judge sitting in White Plains, New York, has confronted the issue of discharged debts being sold to investors by banks. He observed that the buyers of those debts know that a bank “will refuse to correct the credit report to reflect the obligor’s bankruptcy discharge, which means that the debtor will feel significant added pressure to obtain a ‘clean’ report by paying the debt.” In refusing to throw out a lawsuit that has been filed in which the plaintiffs are seeking class action status for their claims against JPMorgan he observed that “the complaint sets forth a cause of action that Chase is using the inaccuracy of its credit reporting on a systematic basis to further its business of selling debts and its buyer’s collection of such debt.”
Of course, until the trial takes place we will not know if the judge’s observation is correct. If it is, he suggested in an earlier case involving the same issue, he would refer the case to the U.S. attorney for criminal prosecution. Jamie wouldn’t care. As in the earlier cases, he will not be criminally charged. His absolution comes by permitting the bank he runs to pay a huge fine to obtain governmental absolution. In a worst-case scenario he might even have to see his salary reduced once again. Another opportunity may just have presented itself.
A U.S. Senate report released November 19, 2014, was highly critical of JPMorgan and other banks for, among other things, exceeding federal limits on commodity holdings. Whether the activities described in the report will result in JPMorgan or any of the other banks paying a fine or Jamie Dimon suffering a salary reduction only time will tell. One thing we know without waiting for events to unfold. JPMorgan stock is a good investment. The bank is always looking for creative ways to make money.
Christopher Brauchli is an attorney in Boulder, Colorado.