Axios Markets

When one of the biggest banks in the world announces a legal settlement with a government agency, normally both sides can at least agree on what is being announced. That wasn't the case earlier this week in the matter of Government of the U.S. Virgin Islands v. JPMorgan Chase Bank.

Why it matters: According to the bank, it simply settled a civil lawsuit out of court — something it does on a regular basis — and did not admit any liability.

• According to the Virgin Islands, the U.S. government has for the first time enforced a sex-trafficking law in a historic and trailblazing settlement that will cause profound changes across the banking world.

The big picture: The lawsuit, which the U.S. Virgin Islands filed under the Trafficking Victims Protection Act (TVPA), alleged that JPMorgan facilitated Jeffrey Epstein's sex-trafficking venture not only by banking Epstein and allowing him to withdraw some $1.75 million in cash for payment to his victims, but also by banking the victims themselves.

• Those victim-clients included one woman who had been identified in the press as early as 2006 — seven years before JPMorgan finally broke ties with Epstein — as being his self-described "Yugoslavian sex slave."

Flashback: JPMorgan separately agreed in June to pay $290 million to settle a class-action suit from Epstein's victims that was brought under the same statute.

The intrigue: JPMorgan claims the lawsuit settled this week for $75 million "was not an enforcement action," per spokesperson Trish Wexler. "The USVI was a civil plaintiff in a civil lawsuit," she says.

• The U.S. Virgin Islands, by contrast, describes the suit as "the first enforcement action filed against a bank for facilitating and profiting from human trafficking."

Between the lines: At stake is the question of whether U.S. Virgin Islands attorney general Ariel Smith, acting as a law enforcement officer, extracted promises from JPMorgan to implement new policies ensuring, among other things, that a client's account is terminated if the bank has credible information that the account is facilitating human trafficking.

• Smith says that's exactly what she did. "As part of the settlement, JPMorgan has agreed to implement and maintain meaningful anti-trafficking measures," said Smith in her press release, which goes on to detail "several substantial commitments by JPMorgan Chase," including "establishing and implementing" a series of policies and procedures.
• In terms of those commitments, "likely none of this would have happened without these cases coming forward," Bridgette Carr, the director of the human trafficking clinic at Michigan Law and an expert witness for the U.S. Virgin Islands, tells Axios.
• The settlement "should sound the alarm on Wall Street about banks' responsibilities under the law to detect and prevent human trafficking," says Smith.

The other side: JPMorgan's Wexler tells Axios that while the settlement agreement lists various "previous and ongoing efforts" to fight human trafficking, "there are no new commitments" in the agreement.

• What's more, according to parts of the agreement seen by Axios, the listed commitments are explicitly described as "ongoing good faith efforts" on the part of the bank — and explicitly are "not contractual commitments."

In the weeds: Under the terms of the TVPA, a state attorney general can bring a civil action as "parens patriae" on behalf of residents of the state.

• Parens patriae is a legal doctrine that gives states standing to file a civil lawsuit on behalf of a victim or (as in this case) a class of victims.
• "Any individual victim really can’t speak to the systemic issues," says Carr. That means it's the parens patriae clause, as added to the statute in 2018, that gives AGs the power to craft far-reaching settlements that extend beyond harm done to individuals.

Zoom out: The Epstein case is a stark reminder that traffickers tend to be the kind of wealthy individuals who are very close to their private bankers.

• The best way for a bank to identify such individuals is not to use AI algorithms trained to sniff out suspicious activity. Rather, it's simply to act on the pre-existing knowledge of its client-facing bankers — the kind of people who, in the case of JPMorgan, would email each other about the number of "nymphettes" at Epstein's residence.

My thought bubble: Even if it doesn't have a lot of teeth, the settlement does a very good job of laying out the kind of actions and policies that a truly committed anti-trafficking bank would adopt.

• JPMorgan's refusal to even mention those commitments in its press release, however, suggests that, like all other big banks, it is far from being a full-throated leader in the war against trafficking.

New Federal Reserve rules meant to make big banks safer — the set of plans known as Basel Endgame — would make it even harder for low- and middle-income Americans, a group that includes a disproportionate number of Black Americans, to get a mortgage.

Why it matters: The Federal Reserve is being torn between two imperatives — strengthening the banking system and preserving the ability of under-served borrowers to get onto the bottom rung of the housing ladder.

The big picture: The Fed's proposals would mark some mortgages — the ones with down payments of less than 20% — as being particularly risky. Those mortgages are issued overwhelmingly to low- and middle-income borrowers.

• Large banks would have to hold more capital against those loans, which in turn would make them more expensive for borrowers.
• Conversely, the banks would need to hold significantly less capital against mortgages in which there was a huge downpayment of 50% or more — thereby further reducing the cost of borrowing for the already wealthy.

Driving the news: A broad coalition has come together to oppose this part of the new capital requirements, including the National Housing Conference, the National Urban League, the National Community Reinvestment Coalition, the Urban Institute (which released a white paper on the subject earlier this month), and now the Bank Policy Institute, which has quantified the effect of the new standards on borrowers of different races.

By the numbers: A mortgage offered to a Black borrower would see its risk weighting rise from 50% to 61.7% on average, per the study by BPI's Paul Calem and Francisco Covas shared exclusively with Axios.

• That means the amount of capital the bank would have to hold against that mortgage would rise by 23%.
• For white borrowers, the rise is much smaller — just 4.8 percentage points, or 9.6%.

Zoom out: At the moment, most first-time homebuyers don't get a mortgage from a bank. Instead, they borrow from nonbanks — who are now closing up shop as demand evaporates in the face of higher interest rates.

• The new capital rules would cause even more migration to nonbank lenders, who tend to shut their doors during recessions and who are much quicker to foreclose on delinquent borrowers, Covas tells Axios.

Where it stands: The Fed is aware of the problem, and nothing is set in stone. Michael Barr, the vice chair for supervision who's overseeing the proposal, has said that "we want to ensure that the proposal does not unduly affect mortgage lending, including mortgages to underserved borrowers."

• A Fed economist, Chris Finger, when questioned by governor Lisa Cook on this matter in July, said that "it might be appropriate to adjust the residential mortgage treatment" in the proposal.

The bottom line: It's natural to expect the bank lobby to oppose any and all attempts to increase bank capital. In this case, however, they seem to have a point.

A court case on this term's Supreme Court docket could end up granting 400 of America's largest corporations some $271 billion in tax relief, per new calculations from the Institute on Taxation and Economic Policy.

Why it matters: The argument being made by the plaintiffs, an American family with minority shares in an Indian farming firm, is that taxing multiple years of accrued income is unconstitutional.

• If the Supreme Court agrees and strikes down the Mandatory Repatriation Tax, that could mean Apple alone would be refunded more than $37 billion that it paid between 2017 and 2022.

The art market was worth $68 billion last year, with substantially 100% of that sum being paid to buy art. Despite many attempts, the market in renting art has never really taken off — until now.

By the numbers: In her profile of for-profit art collector Stefan Simchowitz, the WSJ's Kelly Crow reveals that his art-lending operation, Creative Art Partners, now has 45 employees and saw $10 million in revenue last year.

• CAP CEO Brian Ludlow tells Crow the firm's art (which is to say Simchowitz's collection) is now in more than 180 locations, with monthly rental fees ranging from $750 to $25,000.
• Naturally, if you like it, you can buy it.