JPMorgan Could Pay All-Time Record Penalty of $13 Billion for Mortgage Fraud

Tuesday, October 22, 2013
Jamie Dimon, JPMorgan CEO

JPMorgan Chase has negotiated a tentative agreement with the Obama administration that would require the Wall Street giant to pay a record amount of money for helping cause the 2008 financial crisis.


Under the proposed settlement, JPMorgan would pay $13 billion in fines and compensation to homeowners who were wronged as part of the bank’s questionable mortgage practices that linked subprime loans with securities.


Although the figures could shift during ongoing negotiations, more than $6 billion of the total would compensate investors, such as pension funds that took losses from mortgage securities sold by JPMorgan, as well as by two firms it purchased in the midst of the financial crisis, Bear Stearns and Washington Mutual.


Four billion dollars would go towards relief for struggling homeowners.


The final $3 billion would be the only fine in the settlement, involving a civil investigation into mortgage securities that JPMorgan sold immediately in advance of the crisis.


JPMorgan’s defenders believe that the bank is taking the rap for the practices of Bear Stearns and Washington Mutual, and that many of the securities targeted in the settlement came from the two firms in 2008, prior to their acquisition. However, the Department of Justice has reportedly decided against allocating fines against those two companies because of the federal government’s role in assisting in their takeovers by JPMorgan. Federal officials who were serving at that time insist that that takeover proved to be of great benefit to the government, according to The New York Times. Still, apparently no arm-twisting had to be done, as JPMorgan apparently saw the acquisition well within its interest, in spite of the possibility of future legal liability.


In exchange for paying $13 billion—which would be the largest settlement ever between a bank and the Justice Department—JPMorgan would avoid facing any further civil cases stemming from its troubled mortgage investments.


But the deal would not cover a criminal probe by federal prosecutors in California, and JPMorgan would be required to assist prosecutors with an investigation into former employees who helped create the mortgage investments.


These provisions—along with a contentious “statement of facts” in which JPMorgan would admit guilt— could prevent the deal from going through. They also left some experts feeling uncertain about the bank.


“To not get the waiver from criminal prosecution is not good,” Nancy Bush, a bank analyst who founded NAB Research LLC in New Jersey, told Bloomberg. “What we’re looking for in a settlement of this size is certainty from things like the criminal prosecution of a company. The Street wants certainty.”


The settlement, if concluded, would represent another example of how the Obama administration—which was accused of being soft on Wall Street in the early years of the administration—has been cracking down recently on large financial institutions that break the law.


Three months ago, federal prosecutors and agents in Manhattan unveiled a criminal indictment of the hedge fund SAC Capital, which was accused of insider trading from 1999 to 2010. That case may result in a $1 billion settlement currently being negotiated.


Last year, HSBC agreed to a $1.9 billion penalty over money laundering accusations, and BP paid $4.5 billion for helping cause the Deepwater Horizon oil spill in the Gulf of Mexico.


JPMorgan had offered $11 billion last year to settle the case. If it agrees to pay the $13 billion, that fee would equal more than half of the bank’s record $21.3 billion profit earned in 2012.

-Noel Brinkerhoff, Danny Biederman


To Learn More:

Tentative Deal Hands JPMorgan Chase a Record Penalty (by Ben Protess and Jessica Silver-Greenberg, New York Times)

JPMorgan Said to Reach Record $13 Billion U.S. Settlement (by Tom Schoenberg, Dawn Kopecki, Hugh Son and Dakin Campbell, Bloomberg)

Considering the Fairness of JPMorgan’s Deal (by Peter Eavis and Ben Protess, New York Times)

JPMorgan to Pay $410 Million in Enron-Like Scheme, but Admits Nothing while Execs Go Free (by Ken Broder, AllGov)

JPMorgan Chase Still Going Strong Despite Paying Billions for Long List of Misdeeds (by David Wallechinsky and Noel Brinkerhoff, AllGov)


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