DealBook: Treasury Sells $3 Billion Stake in Ally Financial

DealBook: JPMorgan Chase Nears a $2 Billion Deal in a Case Tied to Madoff

Today's Economist: Medicare Advantage and the ‘Theft’ of $156 Billion

Fair Game: $13 Billion, Yes, but What Took So Long?

“Without a doubt,” Eric H. Holder Jr., the attorney general, said in a statement, “the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown.”

Eager to see what the Justice investigation had found, I consulted the statement of facts that accompanied the settlement and that JPMorgan had to acknowledge. There, I reckoned, would be some juicy, new evidence of the bank’s mortgage misdeeds “uncovered” by assiduous investigators armed with subpoena power and other government might.

Perusing the 11-page document, I quickly saw that I’d reckoned wrong. Much of it was the same-old-same-old, a not-very-lively description of a corrupted Wall Street mortgage factory, based largely on some facts that have been in the public domain for years.

In other words, although it took the Justice Department more than five years to pursue a major bank for its role in the mortgage mania, the investigation seems to have unearthed material that, by and large, could have been dug up with a spoon.

“The facts here are all stuff we knew years ago,” said Kurt Eggert, a professor at the Chapman University law school who testified about mortgage woes before the Financial Crisis Inquiry Commission in 2010. “So you have to ask, ‘Why has it taken so long to hold a bank accountable?’ ”

A good question. A spokeswoman for the Justice Department did not return a phone call seeking comment.

Of course, the government is to be commended for taking action. “Expectations had gotten so low for the Justice Department that I can’t help but be a little pleased that they’ve done something,” said Jeff Connaughton, author of “The Payoff: Why Wall Street Always Wins,” who was chief of staff to Ted Kaufman, a former Democratic senator from Delaware. “Yes, it’s thin and weak, but it’s also the first time in five years they haven’t completely rolled over.”

Still, the meager set of facts cited by the government is surprising. And when you compare the Justice Department’s statement with some of the meaty lawsuits that have been filed against banks by investors and some state securities regulators, it’s thin gruel indeed.

The earlier suits, for example, are brimming with facts, figures and telling accounts from former bank insiders turned confidential witnesses. A case brought against Morgan Stanley more than three years ago by Martha Coakley, the Massachusetts attorney general, was especially revelatory and damning in its details. For example, when a mortgage originator threatened to take its business elsewhere after Morgan Stanley questioned the quality of its loans, the bank quickly capitulated and accepted the loans. Morgan Stanley paid $102 million to settle that one state complaint in June 2010.

Among the many private lawsuits is one filed in January 2012 by Dexia, a European bank that lost money on mortgage securities. That case, like the Justice Department matter, was aimed at JPMorgan as well as its Bear Stearns and Washington Mutual units.

Reading the Dexia suit alongside the Justice Department’s fact statement is an interesting exercise. For example, lawyers for Dexia cited 23 confidential witnesses in their complaint. By contrast, the Justice Department cited one unnamed former employee in its account.

Then there’s the surprisingly narrow breadth of the securities scrutinized by the Justice Department. While the Dexia case reviewed 53 different securitizations underwritten and sold by JPMorgan, Bear Stearns and WaMu, the government examined only 10. By the way, six of the 10 troubled mortgage pools cited by Justice also figured in the Dexia case.

The 10 securities examined by the Justice Department totaled $10.28 billion. That might sound like a lot, but it’s a drop in the $325 billion flood of mortgage securities packaged and sold by Bear Stearns, WaMu and JPMorgan Chase from 2005 to 2007.

Among the few figures cited by the Justice Department were those from due-diligence reports provided to JPMorgan by outside firms examining mortgages that were destined for securitization. These reports were supposed to be a quality-control mechanism so underwriters could be assured that they were selling investors the kinds of loans they expected. But in actuality, banks often ignored the analyses.

In its statement of facts, the Justice Department highlighted one such report covering all of 2006 and the first half of 2007. It said the report showed that more than 6,000 of the loans purchased by JPMorgan in that period had not met the underwriting standards promised to investors. Yet, the department said, the bank accepted 3,238 of those loans for use in its pools.

These are disturbing figures, but they aren’t new. Although the Justice Department doesn’t identify where it got them, they appear to have come from a report provided to the crisis inquiry commission more than three years ago. The report has been available on the Internet since then.

The facts emerged at a commission hearing in Sacramento on Sept. 23, 2010, in testimony by two officials from Clayton Holdings, a major due-diligence firm. D. Keith Johnson, a former president of the firm, was one of them, and his presentation was explosive.

Providing private data from a Clayton report, he showed how over a dozen institutions disregarded the problems identified by the due-diligence firm. The institutions accepted thousands of loans that should have been rejected for use in the securities sold to investors.

It’s hard to analyze whether the $13 billion is a good deal for the government or for JPMorgan. There’s nothing wrong, of course, with the government recycling well-known facts to drag a bank that behaved badly to the negotiating table. Had the Justice Department aggressively investigated the banks’ practices using its full array of powers, who knows how much more it could have generated?

Byron S. Georgiou, a lawyer and former member of the crisis commission who runs Georgiou Enterprises, said he was glad the commission’s findings helped the Justice Department pursue JPMorgan.

“It is much better late than never that the Justice Department has extracted from JPMorgan Chase the largest financial penalty ever paid by any private-sector entity to any government anywhere in the world,” Mr. Georgiou said. “I look forward to the conclusion of more such prosecutions of the many other financial institutions that remain at large, and are just as deserving to be held accountable to the American people for their knowing, deliberate deceptions.”

DealBook: For JPMorgan, $4.5 Billion to Settle Mortgage Claims

Fair Game: A $13 Billion Reminder of What’s Wrong

Was it fair or flawed?

While arguments over the deal’s terms and numbers are to be expected, the discussion so far has seemed to miss its significance as a teaching moment. This possible settlement once again depicts the extensive and damaging behavior that led to the 2008 crisis and its aftermath. For those with short memories, the deal is a refresher course in how far-off the rails our largest financial institutions veered in the years leading up to the mess.

It also stands as a reminder that not enough has been done to fix the flawed incentives in our sprawling and powerful financial system. This applies to both the private sector — the mighty banks — and their supposed minders, the regulators.

The extent of the damage wrought by mortgage miscreants is certainly evident in this settlement. If preliminary reports are accurate, the deal’s beneficiaries will include Fannie Mae and Freddie Mac, the taxpayer-owned mortgage finance giants, as well as a credit union that invested in mortgage securities. Also on the receiving end may be troubled borrowers securing some relief on the terms of their home loans. (Late Friday, the Federal Housing Finance Agency announced that it had reached a settlement with JPMorgan over questionable loans sold to Fannie and Freddie. Under the terms of the agreement, the bank will pay $5.1 billion, which is $1.1 billion more than had been estimated in the $13 billion settlement.)

Like many bankers, Jamie Dimon, the chief executive of JPMorgan, is undoubtedly eager to move past the mortgage crisis. A settlement will help him and his bank start to do that.

But because the proposed deal covers the pernicious activities of not one but three banks — JPMorgan and two defunct institutions, Bear Stearns and Washington Mutual — it helps us recall how comprehensively corrupt the mortgage machinery was. Throw in the case decided by a jury last week against Countrywide Financial (now part of Bank of America), the mortgage lender that created so many poisonous loans it then sold to Fannie and Freddie and you’ve got a hat trick, plus one.

What about those who think that this settlement is too onerous financially? Sorry, but that’s what comes of resolving problems wrought by outsized and reckless financial players. The rewards were large when the sun was shining; surely the costs of resolving egregious deeds should also be significant. And let’s not forget that this is damage the financial institutions did to themselves. Nobody made them underwrite toxic loans, sell them to unwitting investors and misuse beleaguered borrowers.

O.K. — that was then; what about now? Have we made the necessary changes to ensure that such a disaster won’t happen again?

Certainly, the voluminous Dodd-Frank law brought some transparency and other improvements to the financial system, and regulators are finally talking tough on increasing the amount of capital that banks must set aside.

But perils remain, according to Luigi Zingales, a professor of entrepreneurship and finance at the University of Chicago Booth School of Business and author of “A Capitalism for the People,” a 2012 book that examines what has gone wrong in our economic system. Mr. Zingales said that as long as the nation’s largest financial institutions enjoy an implicit government guarantee — and they still do — we remain vulnerable to the crises they can create.

In the book, he writes about how the financial sector, “thanks to its resources and cleverness, has increasingly been able to rig the rules to its own advantage.” Historically, our nation was able to keep the financial sector in check, he writes, “but as the financial system gained strength, it also gained political influence.”

This lobbying might is important, Mr. Zingales writes, because it guarantees that these institutions will be able to influence legislation, such as financial reform, to their advantage. “The political benefit that banks receive by being so big is so significant,” he writes, “that it offsets the inefficiencies, such as fraud, that arise from their enormous size.”

This is where the old Glass-Steagall Act, which separated commercial and investment banking, had a positive impact, Mr. Zingales said in an interview. While he said he didn’t believe that having the Depression-era law on the books would have prevented the recent financial crisis, he said its demise contributed to the growing political power of the industry because all of the players have the same businesses to protect and lobby for.

“When all the financial firms are the same and all large, then they are going to have the same interests and lobby in the same direction,” Mr. Zingales said. If they have competing interests because they cannot all be in the same businesses, their lobbying power shrinks, he added.

What does he suggest we do to reduce the implied guarantees bestowed on the banks? He recommends a two-pronged approach. “First, we must force these institutions to recapitalize more,” he said. “But we must also find a more automatic trigger to force recapitalizations along the way” before trouble hits.

Regulators should rely on a market signal to indicate when banks need to raise capital, he said. “Regulators are always late to the game, so adding that mechanism is quite important,” he said. “They’d come in and say, ‘Either you recapitalize or I will take you over.’ ”

The power so enjoyed by these institutions will obviously make this difficult. So Mr. Zingales suggests a change to the nation’s antitrust efforts that would include an analysis of the increased political muscle that results when an industry consolidates.

“When antitrust lawyers look at a merger, they look at the benefits of the economies of scale and the market power created by concentration,” Mr. Zingales said. “But increased political power is another factor that should be brought into antitrust analysis. These companies become so important politically to the state or country that it is hard to resist transforming their interests into the policy of the country.”

This resistance is difficult, yes. But if taxpayers are to be protected, it is absolutely necessary.

DealBook: K.K.R. to Buy Panasonic Health Care Unit for $1.67 Billion

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China’s Richest Man to Build $8 Billion Film Park

Property developer Wang Jianlin, 58, founder of Dalian Wanda Group, was surrounded by Hollywood stars John Travolta, Nicole Kidman and Catherine Zeta-Jones on Sunday as he launched his most ambitious project yet in the picturesque coastal city of Qingdao.

When completed in 2017, the Oriental Movie Metropolis will boast 20 sound stages, including the world's first underwater studio, a massive convention and exhibition complex, a sprawling shopping mall with an indoor amusement park and seven resort hotels.

The project also will include a yacht club with 300 berths.

"The Oriental Movie Metropolis is a major step in China's strategy to become a global cultural powerhouse," Wang said.

It was not only crucial to the development of Wanda's entertainment business, he added, but also an important step for building China's cultural brand.

For Wang, who was named by Forbes as China's richest man with personal wealth of $14 billion, the Qingdao project also represents the latest move by Wanda Group to parlay its real estate and shopping mall development into a leisure and entertainment empire.

Wanda Group, which is privately held, has invested in 72 Wanda Plazas across China, along with 40 five-star hotels. The company also owns 6,000 movie screens, 62 department stores and 68 karaoke centers.

More recently, the company has turned to offshore markets to expand its real estate and leisure investment. Last year, Wanda closed its $2.6 billion buy-out of U.S. cinema chain AMC Entertainment. Wang this year also announced a 1 billion pound ($1.57 billion) British investment that included the purchase of Sunseeker, Britain's largest luxury yacht maker by sales.

The Wanda chairman told Reuters earlier this month that he could afford to spend as much as $5 billion every year to buy foreign firms or assets.

In an interview on the sidelines of Sunday's ceremony, Wang said that he expected Wanda Group revenue to increase to $30 billion this year, and to continue to increase by $10 billion every year.

Wanda Group says it has total assets of 300 billion yuan ($49.01 billion) and annual revenue for 2012 of 141.7 billion yuan ($23.15 billion).

"We will have more than $50 billion in revenue two years from now," he said. "In 2020, we will have at least $100 billion, even by conservative estimates."

Offshore hotel investment is a major focus of the company's strategy. "In the next eight to ten years, we will build high-end hotels in major cities around the world," he said.

To reach the site of Oriental Movie Metropolis, which is planned as a 376-hectare, eight-phase development, it's necessary to drive about one hour from downtown Qingdao past rows of upscale apartment complexes that appear partially occupied.

Wang, who started his own film production company in recent months that has met with mixed success, explained that movies were a "sunrise industry" in China. He expects Wanda to be among the world's leading 20 entertainment companies by 2016.

He declined to discuss financing for the new project, although he has not ruled out the use of partners or of debt.

($1 = 6.12 yuan)

(Reporting By Jane Lanhee Lee in Qingdao and Matthew Miller in Beijing; Editing by Nick Macfie)

DealBook: Glaxo to Sell Drink Brands for $2.1 Billion

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DealBook: Koch Brothers Make Offer of $7 Billion for Molex

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DealBook: Neiman Marcus Is Sold for $6 Billion

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DealBook: Verizon to Pay $130 Billion to Fully Own Wireless Unit

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DealBook: Verizon Is Expected to Pay $130 Billion for Stake in Vodafone Joint Venture

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DealBook: Apache to Sell Stake in Egyptian Holdings to Sinopec for $3.1 Billion

DealBook: Amgen Said to Be Near Deal to Buy Onyx for $10.5 Billion

Bits Blog: Could the Hyperloop Really Cost $6 Billion? Critics Say No

Housing Stronger, Fannie Mae Posts $10 Billion Profit

The trial of Bo Xilai could embarrass China’s Communist leadership.

Room for Debate asks: What can be done to combat the terrorist networks in North Africa?

Data Points: What the Nation Got for $800 Billion

SINCE last September, when the Federal Reserve announced its third round of quantitative easing, known as QE3, the central bank has spent $800 billion buying bonds. That’s a stupendous sum, more than the budget for the Department of Defense and more than twice what the federal government spends on welfare programs, including food and nutrition assistance, unemployment benefits and disability payments.

Total spent so far on QE3:

$800 billion

Change in 10-year Treasury rate:

UP 0.88

percentage point

This raises an intriguing question: What did the United States get for all that money?

Like previous rounds of quantitative easing, the goals for QE3 included reducing long-term rates, in that way bolstering lending, housing and employment. Those are big tasks, especially with Congress cutting spending. And there have been improvements, both during earlier rounds and during QE3. Since September, housing and employment have strengthened somewhat, and long-term rates fell for a while. Now, though, rates are actually higher than when QE3 began.

“Data are quite mixed on whether we’ve seen an expansion of lending,” said Catherine L. Mann, Rosenberg professor of global finance at Brandeis. Lending has increased for cars and commercial property, she says, but not for small business. New mortgage origination for housing remains weak. Meanwhile, the Fed’s outsize presence in the markets for Treasuries and mortgage-backed securities may have changed those markets in ways no one can predict.

QE3 was intended to make riskier assets like stocks more appealing. And stocks, which are predominantly owned by the wealthy, have risen in price. As a Bank of England study has shown, quantitative easing disproportionately benefits those who are already well off.

The Fed had other options. It could have put cash directly into the hands of consumers who needed it. Under the Federal Reserve Act, it can print and lend any amount of money for any length of time to any person or entity, as long as it is satisfied that it is likely to be repaid. With $800 billion, for example, the Fed could have given every homeowner in the country a $10,000 loan at a near-zero rate of interest. Think of what that might have done for the economy.

DealBook: Activision in $8.2 Billion Deal to Buy Back Stake From Vivendi

Toyota Will Pay $1.6 Billion Over Faulty Accelerator Suit

Owners who sold their vehicles at a loss through trade-ins and resale will receive from $125 to $10,000, depending on the level of depreciation. The settlement represents the end of the economic battle between Toyota and customers after several years of allegations of mechanical and electronic defects, though it does not cover individual personal-injury and wrongful death lawsuits that are still pending.

“This agreement allows us to resolve a legacy legal issue in a way that provides significant value to our customers and demonstrates that they can depend on Toyota to stand behind our vehicles,” said Celeste Migliore, National Business and Field Communications manager for Toyota Motor Sales, U.S.A., Inc. The automaker will take a one-time $1.1 billion charge to its earnings cover the settlement costs.

James V. Selna, United States District Court judge of the Central District of California, who presided over the suit since 2010 after widespread reports of complaints and accidents related to unintended acceleration, granted final approval after the terms were proposed in December.

The settlement is “extraordinary because every single dollar in the cash fund will go to claimants,” Judge Selna said in a statement. A decision posted to the court’s Web site calls the settlement “fair, adequate and reasonable.”

Toyota is required as part of the agreement to install safety upgrades in about 3.2 million of its vehicles. The automaker is to establish two funds of $250 million to compensate owners not eligible for safety upgrades and those who sold their cars between Sept. 1, 2009, and Dec. 31, 2010, at a loss.

The settlement also requires Toyota to pay $30 million for automotive safety research on driver behavior and unintended acceleration. It would also provide a customer support program for more than 16 million current Toyota owners, who will be eligible for free repairs on certain parts for up to 10 years.

The sudden acceleration problems marred Toyota’s reputation for quality. The automaker eventually recalled more than 11 million vehicles in connection with problems including floor mats that caused the accelerator to get stuck.

Steve Berman, who represented the plaintiffs in the class-action suit, called the settlement “a significant financial recovery.”

“This is a great settlement for consumers,” he said in a statement. “It includes both safety fixes to make Toyota vehicles safer as well as monetary relief for owners who saw a reduction in their vehicle’s value.”