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Uncle Sam’s Need to ‘Punish’ Banks Will Have “Chilling Effect” on the Economy: Whalen

Aaron Task
Editor in Chief
Daily Ticker
Uncle Sam’s Need to ‘Punish’ Banks Will Have “Chilling Effect” on the Economy: Whalen

The $13 billion settlement JPMorgan reached with the U.S. government Tuesday is the largest-ever for a single U.S. company and ends months of speculation about when the firm would settle, and for how much.

The deal also raises a lot of questions, including:

  • Is this really the ‘end’ of JPMorgan’s (JPM) legal woes? (A: No. A criminal investigation is ongoing and JPMorgan could face additional civil suits as well)
  • Was this a good deal for the bank? (A: Yes, according to Barry Ritholtz, who tells Breakout's Jeff Macke $13 billion isn’t really $13 billion. The NYT's Peter Eavis takes a similar view.)
  • Did JPM really admit it made “serious misrepresentations to the public -- including the investing public,” as the Justice Department statement claimed? (A: No, according to Bloomberg’s Jonathan Weil.)
  • What are the broader implications of the Justice Department’s vigorous pursuit of a settlement? (A: TBD)

Related: JPMorgan "Just the First Domino": Bill Cohan

In the accompanying video, I discuss all of the above with Chris Whalen, executive VP at Carrington Holdings who says the “real” story for banks is much more concerning.

“The media has paid so much attention to all the settlements – this is sexy stuff,” he says. “But the operating environment for the banks is changing a lot. The latter is more important if you’re an investor interested in financials.”

Related: Jamie Dimon: Still 'Last Man Standing' But Knocked Down a Few Pegs

Specifically, Whalen says the combination of the Fed’s ultra-low interest rates and a much more stringent regulatory environment are going to have a “chilling effect on credit creation.” (While the Fed's zero-interest rate policy was initially good for banks, it is hurting all 'savers,' including banks, who are being forced to sit on higher levels of capital, he notes. "The cheap funding actually enhanced net interest margin, but the point where the 'net' benefit for banks went negative has long since passed.")

That, in turn, will hurt economic growth and limit job creation, he says, creating a cruel circle of irony.

Related: "The Party is Over “ for Housing -- and Bank Earnings: Chris Whalen

Everyone is going on about how we have to ‘punish’ the banks,” Whalen says, introducing Sen. Elizabeth Warren (D-MA) as Exhibit A. “When they see the horrible effects it has on growth in this country, on housing – we’ll see it decelerate next year – I think we’ll have to rethink this.”

But for the moment, at least, the pendulum continues to rapidly swing away from policies that led to the 'bankers-gone-wild' era, circa 1984-2008.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com