DOJ punishing JPMorgan shareholders

Let's imagine a plane crash caused by pilot error in which all the crew members and passengers survive, and the National Transportation Safety Board decides to fine the passengers for the pilot error. The rationale: The passengers should have controlled the pilots and not let them misbehave in such a way as to cause the crash. And besides, the passengers should have known that the pilots were irresponsible, and shouldn't have bought tickets on that airline. Such an action would cause a roar of disapproval. Yet that, in effect, is what the Justice Department has done in bringing charges against JPMorgan Chase & Co. over mortgage-backed securities issued by it, and particularly The Bear Stearns Cos. Inc., which JPMorgan acquired at the behest of the federal government in the midst of the financial crisis. The reported agreement for JPMorgan to pay $13 billion to settle civil charges won't be paid by the employees who packaged and sold the securities, whoever they are, or the managers and executives who were supposed to supervise them. The money ultimately will come from the pockets of JPMorgan's shareholders, i.e., the passengers.

LAYING BLAME

Perhaps the Justice Department would argue that the shareholders should control management. That is great, in theory, but shareholders have no knowledge of the day-to-day decisions made in running companies and find it very hard to replace even one or two directors. Maybe the Justice Department would argue that the shareholders should have known better than to buy JPMorgan's shares in the first place, but JPMorgan even now is regarded as one of the best-managed companies. Or maybe the government just figures that punishing the shareholders will serve as a warning to corporate managers against misbehaving and will deter bad decision making in the future. That is like saying to someone: If you don't behave, I will punish your neighbor. Some deterrent. The Justice Department's approach smacks of taking the easy out — it doesn't have to identify the responsible employees and prove criminality or liability — while extracting a pot of money from JPMorgan's shareholders to be redistributed to the Treasury Department, the Federal Housing Finance Agency and to consumers supposedly hurt by the bad mortgage securities. The shareholders bear no responsibility for any injury and shouldn't be punished.