JPMorgan negotiates through the revolving door

It is quickly becoming clear that JPMorgan’s tentative $13 billion settlement with the Department of Justice is not the massive, overly-punitive sanction that some press reports have made it out to be. The weaknesses in the deal may be explained in part by the fact that in arranging the settlement, JPMorgan was negotiating through the revolving door.

We have the names of the key players involved, thanks to the New York Times: attorney general Eric Holder, associate attorney general Tony West, and deputy attorney general James Cole at the Justice Department, and JPMorgan CEO Jamie Dimon, general counsel Stephen Cutler, and outside counsel H. Rodgin Cohen on the other side of the negotiating table.

Stephen Cutler, JPMorgan’s general counsel, is the former director of the SEC’s enforcement division, a job which gave him experience and contacts that likely serve him well as he fends off legal challenges to the bank. His new position, of course, is much more financially lucrative: he earned over $5 million from JPMorgan in stock awards alone in 2012 (this excludes all cash compensation).

On the other side of the negotiating table (if there are two sides), Holder, Cole, and West are all former white collar defense attorneys. Holder was a partner at Covington & Burling, where his clients included Bank of America and UBS. Cole was a partner at Bryan Cave, where he was appointed as an independent consultant overseeing AIG’s disclosure and compliance practices (and appears to have failed spectacularly in this task).

And lastly, West was a partner at Morrison & Foerster, where his clients in 2008 included none other than Washington Mutual. WaMu, of course, was acquired by JPMorgan Chase in 2008, and its mortgage lending practices are one major reason JPMorgan has such significant legal exposure. West’s disclosure form lists WaMu as a client in 2008, but does not shed light on the nature of the services that he provided.

The DOJ negotiating team.

JPMorgan has been a client of each firm in recent years, though it is unclear if Holder, West, or Cole personally worked on matters for the bank while at their respective firms.*

This white collar defense work pays pretty well, if not at Cutler’s levels. According to financial disclosure forms, Holder received $3.32 million in partnership income from Covington in 2008, before being appointed AG the next year. Cole received $900,000 in 2010 from Bryan Cave, before joining the Justice Department. West received a relatively paltry $318,000 in partnership income from Morrison & Foerster in 2008.

Expect them to be making a lot more in a couple years, if they choose to return to the private sector. While their government salaries are much lower than their private sector compensation, their government service – and their involvement in deals like this one, sitting across the table from Jamie Dimon and negotiating a “tough” deal – has significantly bolstered their value in the marketplace.

Unfortunately, democracy is footing the bill.

*Coincidentally, when JPMorgan settled a $400 million suit with FERC over charges that its commodities unit had been manipulating energy markets earlier this year, it tapped lawyers at Holder’s old firm, Covington & Burling, and West’s old firm, Morrison & Foerster. But the fact that the lawyers at each firm were former FERC officials may go further in explaining why the bank did not suffer greater penalties in that case.

Update (10/23/2013 5:15pm): Tony West, the former WaMu attorney, was the DOJ official who negotiated the details of the settlement with Cutler, after Dimon and Holder got off the phone, according to the NYT:

On a final call that Friday night — Mr. Cutler, Mr. West, Mr. Holder and Mr. Dimon all joined the call — the C.E.O. asked, “What will it take to get this done?”

Mr. Holder informed him that the government would not accept less than $13 billion. And with that, they had a tentative deal.

Mr. Holder and Mr. Dimon left Mr. Cutler and Mr. West to hash out the nuances.

Cole was not reported to be on that phone call, though he was in the room when Dimon and his

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team met with Holder and his team in Washington in late September.