JP Morgan Chase agrees record $13bn settlement charges over toxic mortgages
JP Morgan Chase, the biggest bank in the United States, agreed a record $13bn (£8bn) settlement with regulators on Tuesday, ending months of tense negotiations with the Justice Department over a string of investigations into its risky mortgage deals.
The fine, the biggest civil settlement with any single company, ends several investigations and lawsuits brought by the US authorities related to the sale of home loan bonds between 2005 and 2008. It is more than three times the previous record $4bn fine the US levied against BP for the Deepwater Horizon oil spill.
Settlement talks have been fraught and lengthy. JP Morgan chief executive Jamie Dimon went to the US Justice Department to personally negotiate with attorney general Eric Holder in September, a personal summit that led some critics to claim that Holder was giving the bank special treatment. Tuesday’s agreement staves off a costly and potentially embarrassing trial.
As part of the settlement, JP Morgan acknowledged it made serious misrepresentations to the public – including to investors – about numerous transactions relating to residential mortgage-backed securities. The deals collapsed in 2008 when the housing market plunged and the scale of the risks was exposed, and the resulting financial tumult led to the biggest crisis since the Great Depression.
The admission was a major victory for the Justice Department. Banks have fought shy of such statements fearing yet more legal actions from investors. The settlement leaves open the possibility of potential criminal charges.
“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” said Holder. “JP Morgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior.”
“The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over. No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability,” Holder said.
The settlement was negotiated through the residential mortgage-backed securities (RMBS) working group, a joint state and federal initiative formed in 2012 to investigate wrongdoing in the mortgage-backed securities market prior to the financial crisis. Holder said the group’s investigations were “ongoing”.
John Coffee, a Columbia law school professor, said the fine was in marked contrast to the $1.9bn penalty Holder brought against HSBC for money laundering last December. “In that case he seemed to suggest some institutions were ‘too big to jail’,” said Coffee. In this case, Coffee said, Holder was still looking to bring charges against individuals in the future.
Coffee said the US authorities had so far struggled to charge senior individuals over the excesses of the financial crisis. “But the government is still looking. We may yet see another shoe drop,” he said.
JP Morgan sailed through the financial crisis relatively unharmed, but has been beset by legal woes in the crisis’s aftermath. The fine is the latest, and largest, in a series that has led for some shareholders to call for Dimon’s resignation despite the bank’s financial success and its solid share price:
• Earlier this month, the bank paid $4.5bn to settle allegations it has mis-sold mortgage bonds to pension funds and other institutional investors.
• In September, the company paid $920m to settle US investigations into the “London Whale” trading scandal.
• In the same month, JP Morgan paid another $390m in refunds and $80m in settlement for billing credit card customers for identity theft protection they did not receive.
• In July, the bank paid $410m in penalties and repayments related to alleged manipulation of California and midwest electricity markets.
The latest fine stems in large part from allegations of mis-selling of “toxic” mortgage securities by Bear Stearns and Washington Mutual, two firms JP Morgan purchased during the 2008 financial crisis at the behest of the government.
Of the $13bn resolution, $9bn will be paid to settle federal and state civil claims by various entities related to RMBS.
The heavily trailed agreement appears to have been delayed by arguments over the consumer-relief component of the pact that constitutes the remaining $4bn of the deal. That money will be used to reduce urban blight in areas such as Detroit, where the sub-prime crisis worsened an already struggling housing market and left many homes abandoned. They money will also be used to offer lower rate loans to low-income home buyers.
About $1.4bn will go to the National Credit Union Administration. “Today’s announcement by the Justice Department is extraordinary, and will greatly benefit credit unions that have been paying for the losses caused by the financial institutions covered by this settlement,” NCUA chairman Debbie Matz said.
Brian Kettenring, executive director of the Campaign for a Fair Settlement, said the size of the settlement was a “show of progress toward holding banks accountable for repeatedly breaking the law.”
“Criminal prosecution is still needed to deter future crimes. But more and likely better relief for struggling homeowners is a hard-earned victory for people across the country who have spoken out—and even gone to jail—demanding an end to Wall Street impunity,” he said.
Deborah Castillo, a member of pressure group Home Defenders League who lost her home to foreclosure said: “JPMorgan Chase should halt foreclosures while the settlement is implemented and make a good faith work with the homeowners in our communities who need fair modifications. I hope that funds from this settlement will quickly get to homeowners, who have waited far too long for relief, and are really used to help the families who are struggling and prevent the crime of more empty houses in our communities.”
While this agreement ends a troubled chapter for the bank, other issues remain. A criminal investigation of the bank over mortgages will continue. The bank is also under scrutiny for its hiring practices in China, its massive “London Whale” trading losses and its relationship with Bernie Madoff, the Ponzi scheme fraudster.