Justice Department, JPMorgan Chase bank reach $13B settlement on faulty mortgages

| Sunday, Oct. 20, 2013, 12:01 a.m.

WASHINGTON — JPMorgan Chase, the nation's largest bank, has reached a tentative agreement with the Justice Department to pay a record $13 billion to resolve allegations that it knowingly sold faulty mortgage securities that contributed to the financial crisis, a person familiar with the talks said on Saturday.

If finalized, the deal would be the largest penalty ever paid by a single company, representing a tremendous win for the government after years of public criticism of its struggle to hold Wall Street accountable for its crisis-era misdeeds.

It would leave JPMorgan and its executives at risk of criminal prosecution, a humbling concession. The bank emerged from the financial crisis relatively unscathed but has struggled to shake off the vestiges of that era. Like many banks, it has been accused of selling bad residential mortgages to investors, including Fannie Mae and Freddie Mac, which lost billions when the housing market crashed.

JPMorgan and Justice have been negotiating a potential deal for months, but talks began to heat up a few weeks ago and eventually included direct discussions between the bank's chief executive, Jamie Dimon, and Attorney General Eric Holder.

The stakes are high for both sides.

Pulling off a record settlement would be a significant accomplishment for Holder. Justice has levied multimillion-dollar fines against big banks, including HSBC and Barclays, but to lawmakers and consumer advocates, those penalties are tantamount to a slap on the wrist.

“Resolving the mortgage cases for $13 billion is a major win for the DOJ, particularly since the deal only applies to the civil case,” said Thomas Gorman, a securities lawyer at Dorsey Whitney. “It also brings to account a major Wall Street player for the market crisis, something enforcement officials and the public have been looking for.”

JPMorgan is urgently attempting to wrap up a barrage of investigations into its conduct in recent years, leading the bank last week to report its first quarterly loss in nearly a decade. The bank suffered a net loss of $380 million, having set aside $9.2 billion for litigation expenses. All told, the bank has a $23 billion chest to cover its mounting legal costs.

The deal with Justice could be finalized soon, according to a person familiar with the negotiations who was not authorized to speak publicly. Justice and JPMorgan are hammering out the final details, including a statement listing what the company did wrong. Such an admission of wrongdoing could be used in other legal actions against the bank.

Officials at JPMorgan and Justice declined to comment.

Selling mortgage securities was a brisk business for Wall Street for many years. Banks would pool hundreds of mortgages and market the bundles as investments that could be traded like stocks. When the housing market crashed, the securities were worthless, and investors were left with huge losses.

A key issue during the discussions has been whether JPMorgan and its executives would face criminal prosecution for allegedly knowing that the bank was selling bad mortgages, the person familiar with the negotiations said.

“JP Morgan had been trying to get amnesty for criminal prosecution,” the person said. But Holder, in a phone call this month with Dimon, said, “That was a nonstarter,” the person added.

The full scope of the deal remains unclear, but it would include $4 billion in relief to homeowners, including lowering how much they owe on their mortgage.

About $4 billion would go to the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, to resolve allegations that JPMorgan made false statements and omitted facts about the quality of the securities it sold the mortgage finance twins. Fannie Mae and Freddie Mac, which purchase and insure mortgage securities, received $188 billion in taxpayer bailout money during the crisis.

The deal would end a California probe as well as a lawsuit filed by New York Attorney General Eric Schneiderman in October over shoddy mortgage securities.

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