JPMorgan Chase & Co. (NYSE:JPM)’s recent $13 billion tentative settlement with the Justice Department should make investors cautious, states Rafferty Capital Markets, LLC.

JPMorgan Chase

Richard X. Bove of Rafferty Capital Markets, LLC predicts that JPMorgan Chase & Co. (NYSE:JPM)’s tentative settlement could be just the beginning of the government’s intention to apply its new precedent throughout the industry.

JPMorgan Chase’s settlement

Recently, JPMorgan Chase & Co. (NYSE:JPM) reached a tentative agreement to pay a record $13 billion fine to the Justice Department to settle probes into its residential mortgage-backed securities.

If the amount is confirmed, it would be the largest ever paid by a U.S. company in this type of settlement with the government, well over half the bank’s earnings last year of $21.3 billion. It’s also significantly higher than J.P. Morgan’s previous offer of $11 billion.

Following JPMorgan Chase & Co. (NYSE:JPM)’s tentative agreement, it was reported that the U.S. mortgage watchdog Federal Housing Finance Agency had also sought $6 billion from Bank of America Corp for settlement of claims that the bank has willfully sold RMBS to Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

Citing known sources, Financial Times reported the biggest banks in the U.S. will end up with large sweeping settlements similar to that just agreed to by JPMorgan.

Setting precedent

Richard X. Bove of Rafferty Capital Markets, LLC points out that if JPMorgan Chase & Co. (NYSE:JPM)’s settlement goes through, it might point to the government setting a precedent wherein the buyer of a distressed company is culpable for the acts of the acquired firm even if the buyer had no knowledge of the actions of the acquired company.

Mr. Bove questions whether the government would apply this set of precedents to JPMorgan Chase & Co. (NYSE:JPM) alone or if the government would in fact seek to extort funds from other banks involved in the assisted mergers.

Growth would be hampered

Richard X. Bove cautioned that if the government chooses to apply the precedents to other banks, investors should be rethinking their commitments to other banks such as Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC), PNC Financial Services Group Inc (NYSE:PNC), U.S. Bancorp (NYSE:USB) and BB&T Corporation (NYSE:BBT).

Mr. Bove warned that if the banks are required to admit guilt, it will start a feeding frenzy of civil suits, forcing the banks not to lend money to assist the growth of the U.S. economy. This would go a long way to achieve the government’s goal of breaking up the big banks.

Mr. Bove concluded that the supposed settlement between JPMorgan Chase & Co. (NYSE:JPM) and the government is more than a personal battle between the President and Jamie Dimon and hence this could just be the beginning of the government’s activities, not the end. He cautioned that such a move would affect the growth of stockholders and job holders besides hampering the growth of the economy.