JPMorgan Chase & Co. has reportedly agreed to pay $13 billion to settle claims that it sold faulty mortgage backed securities (MBS) to investors prior to the financial crisis.
Should the preliminary settlement deal with federal prosecutors be approved, it would be the largest penalty ever paid by a U.S. bank.
The tentative agreement with the U.S. Department of Justice (DOJ) would resolve multiple sets of allegations brought against JPMorgan – however, it would not release the bank from criminal liability, as had been previously negotiated, according to a Reuters report citing anonymous sources close to the deal. That means the DOJ could still seek to bring criminal charges against bank officials.
The deal is still in negotiations, and the talks could still stall, according to the report.
On Sept. 25, JPMorgan Chase CEO Jamie Dimon met with Attorney General Eric Holder to hash out a deal to resolve the Department of Justice lawsuit, which alleges that the bank sold billions in faulty mortgage-backed securities to investors from 2005 to 2007.
Initially, JPMorgan had offered to pay a roughly $7 billion fine and provide $4 billion in relief for struggling homeowners to resolve the matter; however, federal prosecutors rejected the bank's offer to pay a $7 billion fine. As per the recent negotiations, the fine has been increased to about $9 billion – however, it should be noted that the settlement covers multiple sets of allegations, and terms of the deal are still being finalized.
Last month, the bank agreed to pay $920 million in penalties to U.S. and U.K. regulators for violating securities laws in 2012, following separate probes into a $6.2 billion trading loss known as the ‘London Whale’ scandal.
That investigation led to the indictment of two former JPMorgan traders: Javier Martin-Artajo and Julien Grout are accused of hiding hundreds of millions of dollars of losses within the bank's chief investment office in London by marking positions in a credit derivatives portfolio at inflated prices. The two men were under the supervision of former trader Bruno Iksil, also known as ‘The London Whale,’ who was involved but reportedly is not likely to face charges in the scandal.
In addition, the U.S. attorney's office in Manhattan has brought charges against JPMorgan regarding violations of the rules of the Federal Housing Administration's mortgage insurance program. That settlement has reportedly been bundled in with the overall DOJ settlement that is currently being negotiated.
The settlement will also resolve allegations brought by the Federal Housing Finance Agency that JPMorgan sold faulty mortgages to government-sponsored enterprises Fannie Mae and Freddie Mac. That settlement, for approximately $4 billion, will be bundled with the DOJ settlement that is currently being negotiated, according to the report.
The $13 billion settlement also resolves a lawsuit filed by Eric T. Schneiderman, the New York attorney general, pertaining to faulty mortgages that JPMorgan inherited from Bear Stearns, which it purchased in 2008.
A similar case brought by prosecutors in Pennsylvania was focused on mortgages JPMorgan inherited from Washington Mutual when it acquired that firm the same year, however, it is unclear whether that settlement remains a separate case.
JPMorgan is also facing a separate lawsuit from federal prosecutors in California regarding MBS it sold to investors pre-crisis – as well as possible criminal charges in a parallel investigation brought by prosecutors from the U.S. attorney's office for the Eastern District of California, also relating to the sale of faulty MBS. So, even if the bank finalizes the $13 billion settlement with the DOJ, its legal troubles will not be over.
