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JPMorgan's $13 billion fine: Payoff, not extortion

October 21, 2013: 3:40 PM ET

Some are saying it was extortion. Others are saying it was unfair. But Jamie Dimon, the head of the U.S.'s largest bank, knows what he is doing.

JPMorgan CEO Jamie Dimon

JPMorgan CEO Jamie Dimon

FORTUNE -- A lot of people are questioning whether JPMorgan Chase's reported fine of $13 billion to settle claims that it misled investors in mortgage bonds is excessive. It would, after all, be the largest settlement any single bank has ever paid to regulators.

But perhaps the better question is this: Why did CEO Jamie Dimon agree, if it has, to $13 billion?

Yes, regulators have plenty of evidence that JPMorgan (JPM) -- along with Bear Stearns and Washington Mutual, both of which JPMorgan bought -- sold bonds to investors that were not what they claimed. But every bank did that. And there is no evidence that JPMorgan was the worst offender. Fannie and Freddie lost more money on bonds underwritten by Bank of America (BAC) and Countrywide, which BofA acquired.

MORE: JPMorgan's fine is bad news for Bank of America, Wells

That, of course, isn't a good defense, but it should play into considerations of just how much money JPMorgan should have to pay. What's more, last year, the Justice Department and the Securities and Exchange Commission dropped a similar case it had pursued against Goldman Sachs (GS) without bringing charges. An SEC case against Wells Fargo (WFC) for selling mortgage bonds that the regulator has been pursuing for close to a year and a half appears to have gone nowhere.

JPMorgan isn't even getting immunity from criminal charges. The government faces an uphill battle, but those charges are still a risk even after $13 billion, which, just for comparison, is about $5 billion more than it would cost to build Elon Musk's hyperloop.

Some have called the fine extortion. The government has JPMorgan in the corner, and it's extracting as big a fine as it possibly can because it knows the bank can pay. The Wall Street Journal published an editorial on the fine titled "The Morgan Shakedown."

But that assumes JPMorgan had to pay, and that it had to pay now. It is hard to know what the bank's board of directors wanted, but there is little evidence there was a gun to Dimon's head to make a deal. JPMorgan's stock is up 28% in the past year, even as the bank's legal problems have intensified. So, it doesn't seem like shareholders were pushing for a settlement. Dimon could have fought the charges if he thought it was a bad deal.

MORE: JPMorgan: We're prepared for $23 billion in legal fees

Here's another way to look at JPMorgan's outsize fine: Perhaps it was a payoff. Regulators were looking for a win against banks. They could have pushed for Jamie Dimon to step down as CEO, or they could have forced him to give up his role as both chairman and CEO. Given the regulatory and legal troubles the bank has faced recently, pushing for Dimon to give up his dual role at the company would seem like justified punishment.

And remember, while 80% of the investor losses that JPMorgan is settling were on bonds originated by either Bear Stearns or Washington Mutual, that doesn't mean that 80% of the wrongdoing was committed by those two banks. The Justice Department's civil case, which appears to be the impetus for the large settlement, was based on mortgage bonds that JPMorgan sold from 2005 to 2007, well before it bought either of those banks. Dimon was the CEO for much of that time.

And yet there appears to be little or no heat on Dimon. In fact, while the details of the settlement aren't out yet, it appears that all of JPMorgan's current management will be safe from personal punishment. The bank has reportedly agreed to cooperate with regulators in cases against ex-employees but not against current executives, and presumably some of those employees the government wants to go after are from Bear Stearns or Washington Mutual. None of those cases appear to be part of this $13 billion settlement. So, once again, we have a bank paying an enormous fine to settle claims that it broke the law with no individuals being charged for doing anything wrong. The crimes committed themselves.

And Dimon knows that his scalp would be a valuable haul for the regulators. But a really, really large fine is nice too. So that's what Dimon gave them. Yes, regulators might have been asking for even more. But that doesn't mean that two-thirds of what they were looking for isn't a payoff for keeping Dimon and his top executives safe from punishment.

MORE: Goldman Sachs still earns it's money in soon to be banned ways

On a recent earnings call with analysts, Dimon said he wasn't stupid. Before buying Bear Stearns and Washington Mutual, he asked regulators to give JPMorgan immunity against any wrong deeds Bear and WaMu might have committed before JPMorgan acquired them. Dimon was doing his part to help save the financial system.

The Justice Department basically told Dimon, no. So, you would think that Dimon and his team took into consideration the future legal costs when they bought those two banks, which have turned out to be profitable acquisitions. They have also solidified JPMorgan's position as the nation's largest bank, which has helped it take more business from Goldman, Morgan Stanley (MS), and others. A big fine could have been baked into the price from the beginning, which is why Dimon is willing to pay it.

But perhaps the best reason for explaining why JPMorgan is paying $13 billion is Dimon's own: He's not stupid. There's a reason he's richer than you and me. He's getting more than you think for his $13 billion.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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