JPMorgan in tentative $13-bn settlement with US regulators

21 Oct 2013

US banking giant JPMorgan Chase & Co has reached a tentative agreement with the US Justice Department (DoJ) to pay a record $13 billion fine to settle regulatory investigations related to its handling of mortgage-backed securities in the years leading up to the 2008 financial crisis, according to several US media reports.

The amount, the largest penalty ever to be paid by a single company in a regulatory probe settlement, however, looks paltry compared to the billions of dollars investors had lost on buying those mortgage-backed securities.

The $13-billion settlement could include $9 billion in fines and $4 billion in relief to Americans who lost their homes or who owe more on their mortgages than their what their homes' are worth.

JPMorgan and the DoJ have been negotiating for months, but a tentative deal to pay the $13 billion fine was reached when JP Morgan's CEO Jamie Dimon and lawyers held direct talks on Friday with US Attorney General Eric Holder and his deputy Tony West.

Both sides are still hammering out the final statement listing out the wrongdoings of the bank, because an admission would invite other legal actions from individual investors who have lost money.

But according to the reports, though the fine would settle all civil claims, JPMorgan could still face possible federal criminal charges being pursued in California or individual criminal claims.

While JPMorgan overcame the worst losses in the financial crisis, the investment bank continued to lose money since May 2012, on derivative bets that were known as the `London Whale' trades.

Those bets cost the bank more than $6.2 billion in pre-tax earnings and heightened Dimon'S problems with regulators; last month, the bank was fined $920 million for the "London Whale" trading scandal. (See: JPMorgan to pay $920-mn fine over 'London Whale' scandal) <http://www.domain-b.com/finance/institutions/JP_Morgan/20130920_london_whale.html>

Last year Dimon had dismissed the scandal as a "tempest in a teapot".

Faced with over a dozen investigations worldwide, including in the US, JPMorgan is now offering to pay up in the hope of easing some of the regulatory pressures.

Most of the investigations are related to billions of dollars in losses suffered by investors in sub-prime mortgage securities issued by mortgage lender Washington Mutual and investment bank Bear Stearns between 2006 and 2007.

Both Washington Mutual and Bear Stearns were rescued from a near-collapse through a take over by JPMorgan in 2008.

Bear Stearns allegedly defrauded investors by packaging and selling poor quality mortgage assets that it knew were likely to default.

Investors have so far suffered losses of around $22.5 billion on more than 100 sub-prime securities the company had issued.

The probe is the first action from the residential mortgage-backed securities (RMBS) taskforce, instituted by President Barack Obama in January 2012 to investigate and prosecute alleged frauds tied to mortgage securities that surfaced during the 2008 financial crisis.

It was formed amid widespread criticism over the government's inaction to hold financial sector offenders responsible for the financial crisis.

The New York attorney general has alleged that Bear Stearns led investors into believing that the mortgage securities in its portfolio had been carefully evaluated and would be continuously monitored.

Bear Stearns failed to do either, resulting in investors buying securities backed by mortgages that borrowers could not repay and defaulted in large numbers.

Mortgage-backed securities are financial products consisting of mortgages pooled together and repackaged and sold to investors as securities.

In the run up to the global financial crisis, sub-prime mortgages were sold to people with low credit and many of them defaulted on their loans when the mortgage market bubble burst, leading to huge losses for banks and other financial institutions which became burdened with so-called ''toxic assets'' requiring taxpayer-funded bailouts.

In 2011, the US Federal Housing Finance Agency filed lawsuits against 17 of the world's top financial institutions including JPMorgan, saying they sold $196 billion of risky home loans to government sponsored mortgagers Fannie Mae and Freddie Mac without adequate scrutiny.

JPMorgan's involvement amounted $33 billion in the deals.

JPMorgan has been arguing that it is being hauled up for buying Bear Sterns at the behest of the Federal Reserve in order to help the government's efforts to save the economy.

for JPMorgan, the penalties it has agreed to are manageable - it is the biggest bank by assets in the US, and reported a net income of $21.3 billion last year, though last week it reported a rare quarterly earnings loss of $9.2 billion, mostly due to legal costs.

JPMorgan posted a loss of $380 million last quarter, compared with a profit of $5.7 billion in the same period last year. The bank has set aside a fund of $23 billion to deal with mounting legal costs.

JPMorgan has already spent about $5 billion a year on legal costs in the past two years, relating to the London Whale trade bets and the scams related to mortgage loans and mortgage securities.

With total assets of $2.509 trillion, JPMorgan is ranked as the largest bank in the US by assets and the second largest bank globally in 2012.