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Commentary: Time For Bailouts To End

Feb 6, 2014

Fresno State business law professor Ida Jones
Credit Fresno State

Taxpayers have already bailed out banks during the past several years and now one of them wants to get bailed out again. In this edition of Valley Public Radio’s commentary series The Moral Is, Ida Jones, professor of Business Law at Fresno State, argues that taxpayers should not have to continue to bail out financial institutions that speculated in mortgage securities and then lost when the real estate market collapsed.


Just when you thought it was safe to come out of the water because taxpayers had finishing bailing out financial institutions that lost money gambling on mortgage securities, along comes JP Morgan to ask for more money.

In 2008, JP Morgan purchased the federally insured bank, Washington Mutual, or WaMu, for $1.9 billion. That was $7 billion less than it had originally offered. It got such a great deal because the FDIC supported the move: JP Morgan would take over WaMu’s assets along with its massive mortgage debts, and the FDIC had one less bank to liquidate. Problem solved, right?

Not so fast, though!

A few weeks ago, JP Morgan sued the FDIC arguing that JP Morgan didn’t really mean to take on ALL of WaMu’s mortgage liabilities. In its lawsuit, JP Morgan now claims that it agreed to take on only a small amount of WaMu’s liabilities and that the FDIC has to pay for the remainder. Coincidentally, this lawsuit was filed approximately 6 months after JP Morgan agreed to a $13 billion settlement the government had brought against it for its misconduct in the mortgage market.

In the current lawsuit JP Morgan doesn’t state an amount it wants from the FDIC, or, in other words, from the taxpayers, and eventually, a judge will have to decide who should win. But, we already know who will lose.

Who will pay for the lawsuit costs? Who will provide funds if the remaining WaMu receivership funds are not enough? The taxpayers, of course.

There’s something wrong with this system when taxpayers, many of whom lost their homes, have to continue to support banks whose gambles in the mortgage market didn’t pay off. Taxpayers, some who have gingerly begun dipping their toes into the housing market, may want to stay out of the water a little bit longer.