 "JPMorgan says 'mea culpa' in $13 bn settlement with US")
The behavior that the largest US bank admitted to, authorities said, is at the heart of what inflated the housing bubble: lenders making bad mortgages and selling them to investors who thought they were relatively safe. When the loans started turning bad, investors lost faith in the banking system, and a housing crisis turned into a financial crisis.
The civil settlement marks the end of weeks of tense negotiations between JPMorgan Chase, which is looking to move past the legal issues that have plagued it for more than a year, and the US government, which is under pressure to hold banks accountable for behavior that led to the financial crisis.
JPMorgan said it has set aside all the funds it needs to cover the settlement, meaning the deal will have no impact on its earnings. The deal resolves most of its mortgage issues with federal authorities, the bank said. JPMorgan's shares rose 0.7% to close at $56.15 on Tuesday.
But even after the settlement, the bank faces at least nine other government probes, covering everything from its hiring practices in China to whether it manipulated the Libor benchmark interest rate. It may still also face criminal charges linked to mortgage matters. The bank's outspoken chief executive, Jamie Dimon, avoided the worst pitfalls of the financial crisis, but now is discovering he did not avoid all of them.
The bank said last month it had set aside $23 billion to cover litigation expenses. On Tuesday, it said it has set aside enough to cover this settlement.
Meanwhile, the Department of Justice, which led the negotiations with JPMorgan, said that JPMorgan was not a solitary investigation.
More From This Section
"The Justice Department's financial fraud investigations are far from over," US Attorney General Eric Holder said in a statement.
At issue in Tuesday's settlement was the long chain of parties between the original mortgage lender and the ultimate investor in the loan in the years leading up to the crisis. Often smaller lenders would make subprime mortgage loans, and sell them to a bank, which would package loans into bonds, and in turn sell them to investors. With so many middlemen, investors had poor information about what they were buying, and capital flowed to loans that arguably should never have been made.
"Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown," Holder in a statement.
The investors that bought these mortgage bonds demanded that the loans be of a particular quality. JPMorgan said the loans met the guidelines, but one of its employees said they did not, the bank admitted.
Outside firms that reviewed some of those loans for JPMorgan in 2006 and 2007 said that 27% of them did not meet underwriting guidelines, but the bank still packaged at least half of those into mortgage securities, the government said.
JPMorgan's Chief Financial Officer Marianne Lake said on a conference call that the bank did not admit to any violations of law, and does not believe the facts it admitted to have any bearing on remaining litigation.
A person involved in the negotiations said the 11-page statement of fact that the bank admitted to was the subject of prolonged negotiation.
BREAKING IT DOWN
The government called the settlement the largest in US history, but the deal is really several rolled into one. It includes a $4 billion relief package with US Department of Housing and Urban Development, and a $4 billion settlement with the Federal Housing Finance Agency, which oversees government mortgage financing companies Fannie Mae and Freddie Mac.
Of the $4 billion settlement with HUD, at least $1.5 billion will go toward loans the bank is forgiving. As much as $500 million will go to change the terms of loans to lower monthly payments.
The remaining $2 billion will be for assorted purposes, including new loans for low- and moderate-income borrowers in areas that have been hard-hit by the housing crisis and for demolition of abandoned homes.
Of the $13 billion settlement, $4 billion is for the HUD relief package, $4 billion is for the FHFA deal, and $5 billion is for a civil penalty to the Justice Department and claims from other state and federal government entities.
Broken down differently, the bank is paying a total of $9 billion of cash and $4 billion for the relief package from the HUD settlement.
After taxes, the settlement should cost JPMorgan about $9 billion, because about $11 billion of the settlement is tax deductible, said Gregg Polsky, a law professor at the University of North Carolina.
MORE COMING
A person involved in the JPMorgan negotiations said that the pattern of bad mortgages being packaged and sold to investors was spread throughout across the banking industry. He noted that the bad deals in question were created not only by JPMorgan, but also by two failed banks it took over during the financial crisis, namely Bears Stearns and Washington Mutual.
"Right now, the banks all are holding their breath," said James D. Cox, a law professor at Duke University who specializes in corporate and securities law. "They understand it means a big number for them as well."
On a call with analysts, when asked why the Department of Justice acted first on JPMorgan, Dimon said, "You've got to ask them....It could have been somebody else. There was going to be a first."
JPMorgan and government agencies reached a tentative agreement in mid-October and have been hammering out details since then. New York Attorney General Eric Schneiderman was also involved in discussions.
JPMorgan's negotiations with the Justice Department began in earnest last spring, after Justice Department lawyers in California preliminarily concluded that the bank had violated US civil laws. The Justice Department had looked into mortgage bonds the bank sold from 2005 through 2007, the company said in August.
The talks went sour, and government lawyers prepared to file a lawsuit against JPMorgan in September and scheduled a news conference to announce it. But they canceled it at the last minute as JPMorgan reached out to government officials to discuss a settlement. JPMorgan's Dimon met US Attorney General Eric Holder later that month to talk about a deal on mortgage probes.
Negotiations were difficult, people involved in the matter said. Parties joined the talks, then dropped out. In recent weeks, they stopped, only to restart. Details of the deal were being worked out hours before it was announced on Tuesday, said one person involved.
The settlement is the most significant action to come out of a task force the Obama administration created in January 2012, years after the height of the financial crisis, to probe the packaging and sale of shoddy home loans.
Lawmakers and others have been critical of the administration's failure to hold Wall Street banks, executives, and other parties accountable for the excesses that resulted in the housing crisis.
The task force included representatives from the Justice Department, the US Securities and Exchange Commission, and the New York State Attorney General, among others.
JPMorgan's settlement was with the Department of Justice, several state Attorneys General, the Federal Deposit Insurance Corp, the National Credit Union Administration, and the FHFA.