The boss of America's biggest bank, JP Morgan, was on Thursday personally negotiating a new financial settlement with US regulators over allegations stemming from the way the bank sold sub-prime mortgage bonds before the banking crisis. The settlement could reach a record $11bn (£7bn)
Jamie Dimon, one of the few bankers still at the helm of a big bank following the 2008 financial meltdown, turned up for face-to-face talks with the US attorney general, Eric Holder, at the department of justice in Washington. The negotiations prompted fresh speculation that Dimon will be forced to agree to a payout bigger than the $4.5bn paid by BP over the Gulf of Mexico oil spill.
There are suggestions JP Morgan could be forced to make $4bn of payments to consumers and $7bn of penalties to cover losses incurred from the way mortgages were packaged by JP Morgan as the financial crisis took hold.
The new payout negotiations come only a week after JP Morgan was fined $920m by regulators in the US and the Financial Conduct Authority in Britain over the $6.2bn trading losses that became known as the "London Whale" incident a year earlier.
In an unusual move, JP Morgan admitted wrongdoing and was accused of "unsafe and unsound practices" in derivatives trading taking place in the so-called chief investment office. On the same day the bank was forced to hand over $390m in fines and refunds for overcharging credit card customers.
If the new payout reaches $11bn the bank will have had to pay $30bn in fines and settlements over the past four years. It has already incurred $17.3bn in regulatory fines in the three years to 2012 and in recent regulatory filings – which contain 10 pages of legal disclosures – the bank estimated it faced a possible $6bn of further costs. The sums being discussed in Washington would be well in excess of that figure.
The timescale for concluding the discussions is so far unclear owing to the complexity of the issues and the number of US authorities involved. They include not just Holder's justice department but also the New York attorney general, the securities and exchange commission and federal housing departments.
During the crisis, JP Morgan stepped in to take over Washington Mutual and Bear Stearns and Dimon was viewed as one of the only bankers to have escaped the crisis with his reputation intact. However, the string of punishing regulatory scandals has now put him under pressure.
When US prosecutors levelled criminal charges against former JP Morgan traders in relation to the Whale incident, Preet Bharara, New York attorney general, said: "This was not a 'tempest in a teapot' [a phrase used by Dimon to describe the incident when it emerged], but rather a perfect storm of individual misconduct and inadequate internal controls."
After the Whale fine, Dimon warned that "in the coming weeks and months we need to be braced for more to come" amid speculation that his relationship with regulators is deteriorating.
Even if a settlement can be reached over the way sub-prime mortgages were packaged and sold to investors ahead of the banking crisis, JP Morgan faces a string of other potential wrangles. It is not clear if some of these could be part of the current talks.
Some of the problems related to the takeover of Bear Stearns and Washington Mutual which were big players in the once lucrative business of packaging up mortgages into what looked like safe investments. When the credit crunch hit in 2007 the value of these products collapsed and left holders with large losses.
Dimon, who earlier this faced down calls for his roles as chairman and chief executive of the bank to split, has been softening the ground for hefty settlements in recent weeks. In a staff memo last week he wrote that since 2012 more than 4,000 extra staff had been assigned to risk, compliance, legal and finance departments with an extra $1bn being spent on controls. Staff have undergone 750,000 hours of training on compliance procedures.
JP Morgan fines and settlements: the last two years
2011 Hands over $228m to settle allegations that the bank manipulated the bidding process for municipal bonds
2012 Among five banks made to pay $25bn in penalties and compensation over the robo-signing scandal (illegal repossession procedures which evicted many people from their homes unecessarily or prematurely)
2013 Among 13 banks that have to pay $9bn in cash and other help to homeowners over the robo-signing scandal
2013 Hands over $920m in fines relating to its lack of internal controls in the wake of the $6bn trading loss run up by the "London Whale" trader
2013 Hands over $410m to settle allegations of manipulating the electricity market in California
2013 Hands over $390m in fines and rebates for overcharging credit card customers
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