JPMorgan, government reach $13B deal on mortgage bonds

Friday, November 15, 2013, Vol. 37, No. 46

WASHINGTON (AP) — JPMorgan Chase & Co. has agreed to pay $13 billion in a landmark settlement after it acknowledged that it misled investors about the quality of risky mortgage-backed securities ahead of the 2008 financial crisis.

The settlement announcement Tuesday with the Department of Justice is the largest ever between the U.S. government and a corporation. It also included settlements with New York, California and states.

JPMorgan and other banks sold securities that plunged in value when the housing market collapsed in 2006 and 2007. That triggered a financial crisis that pushed the economy into the worst recession since the 1930s.

The landmark deal, reached after months of negotiation, could serve as a template for similar settlements with other banks. As part of the deal, JPMorgan agreed to provide $4 billion in relief to homeowners affected by the loans. The bank also acknowledged that it misrepresented the quality of its securities to investors.

"Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown," Attorney General Eric Holder said. "JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm's behavior."

JPMorgan will also pay $2 billion in civil penalties to the federal government and about $1 billion to New York state. Another $6 billion will go toward compensating investors.

In a statement, JPMorgan CEO Jamie Dimon said that the settlement covers a "very significant portion" of the banks troubled mortgage-backed securities, as well as those it inherited when it purchased Bear Stearns and Washington Mutual in 2008.

"We are pleased to have concluded this extensive agreement with the (government) and to have resolved the civil claims of the Department of Justice and others," Dimon said in the statement.

The deal eclipses the record $4 billion levied on oil giant BP in January over the worst offshore oil spill in U.S. history.

While the $13 billion that JPMorgan is paying is a staggering sum, it represents only about 40 percent of the bank's $21.3 billion net income reported for 2012. And JPMorgan has already set aside $23 billion this year to cover the settlement and other legal costs related to its troubled mortgage businesses.

The settlement should clear away nearly all of JPMorgan's legacy legal troubles that the bank inherited when it purchased Washington Mutual and Bear Stearns, said Erik Oja, an equity analyst with Standard & Poor's who covers the banking industry.

"These things are never 'one and done' and there'll be more civil charges, but as we have seen in the past, these sort of settlements really do help clear away most of the issues a bank might have had in the past," said Oja, who has a "strong buy" on JPMorgan's shares.

Of the $4 billion set aside for consumer relief, about a third will be used to write down mortgage principal. Dennis Kelleher, the president of Better Markets, a group that advocates strict financial regulation, said JPMorgan may receive credit for loans that it previously wrote down.

"Banks agree to do things that they are doing already, and then they get credit for it," Kelleher said. "It's not $4 billion in actual dollars. Its $4 billion in value that JPMorgan claims it is paying."

The bank will also use some of the money to reduce mortgage rates, issue new loans and help revive blighted properties in cities hit hard by the housing crisis.

An independent monitor will be appointed to oversee the assistance to homeowners.

Still to come is a decision on whether the Justice Department will file criminal charges against JPMorgan. An investigation is under way by the U.S. Attorney's office in Sacramento, Calif.

As part of the $6 billion to investors, $4 billion will resolve government claims that JPMorgan misled mortgage finance giants Fannie Mae and Freddie Mac about risky mortgage securities the bank sold them before the housing market crashed. That part of the deal was announced Oct. 25. Fannie and Freddie were bailed out by the government during the crisis and are under federal control.

Mounting legal costs from government proceedings pushed JPMorgan to a rare loss in this year's third quarter, the first under CEO Jamie Dimon's leadership. The bank reported Oct. 11 that it set aside $9.2 billion in the July-September quarter to cover the string of legal cases against the bank. JPMorgan said it has placed $23 billion in reserve to cover potential legal costs.

On Friday, the company announced it had reached a $4.5 billion settlement with 21 major institutional investors over mortgage-backed securities issued by JPMorgan and Bear Stearns between 2005 and 2008. The investors, which include Goldman Sachs, said the bank deceived them about the quality of high-risk mortgage securities.