JP Morgan agreed to pay a record $13bn to settle legal charges related to its mortgage business on Tuesday, ending months of tense negotiations with the US Justice Department.
The fine, the biggest civil settlement with any single company, ends several investigations and lawsuits related to the sale of home loan bonds issued before the financial crisis.
Settlement talks have been fraught and lengthy. JP Morgan chief Jamie Dimon went to the Justice Department to personally negotiate with attorney general Eric Holder in September. The deal, which staves off a costly trial, was rumoured to be close to collapse as late as last month.
As part of the settlement, JP Morgan acknowledged it made serious misrepresentations to the public –including investors – about numerous residential mortgage-backed securities (RMBS) transactions. The admission was a major victory for the Justice Department. Banks have fought shy of such statements, fearing yet more legal actions from investors.
“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” said Holder. “JP Morgan 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.”
The settlement was negotiated through the RMBS working group, a joint state and federal initiative formed in 2012 to investigate wrongdoing in the mortgage-backed securities market prior to the financial crisis.
“The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over," said Holder in a prepared statement. "No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability. I want to personally thank the RMBS working group for its tireless work not only in this case, but also in the investigations that remain ongoing.”
New York attorney general Eric Schneiderman, co-chair of the RMBS working group, said: “Since my first day in office, I have insisted that there must be accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy.
“This historic deal, which will bring long-overdue relief to homeowners around the country and across New York, is exactly what our working group was created to do. We refused to allow systemic frauds that harmed so many New York homeowners and investors to simply be forgotten, and as a result we’ve won a major victory today in the fight to hold those who caused the financial crisis accountable."
JP Morgan sailed through the financial crisis relatively unharmed, but has been beset by legal woes in the crisis's aftermath. The fine stems in large part from allegations of misselling of “toxic” mortgage securities by Bear Stearns and Washington Mutual, two firms JP Morgan purchased during the 2008 financial crisis at the behest of the government.
Of the $13bn resolution, $9bn will be paid to settle federal and state civil claims by various entities related to RMBS.
The heavily trailed agreement appears to have been delayed by arguments over the consumer-relief component of the pact, which constitutes the remaining $4bn of the deal. That money will be used to reduce urban blight in areas like Detroit where the sub-prime crisis worsened an already struggling housing market and left many homes abandoned. They money will also be used to offer lower rate loans to low-income home buyers.
While this agreement ends a troubled chapter for the bank, other issues remain. A criminal investigation of the bank over mortgages will continue. The bank is also under scrutiny for its hiring practices in China, its massive “London Whale” trading losses and its relationship with Bernard Madoff, the Ponzi scheme fraudster.
Brian Kettenring, executive director of the Campaign for a Fair Settlement, said: “The size of the JPMorgan Chase settlement is a show of progress toward holding banks accountable for repeatedly breaking the law. Criminal prosecution is still needed to deter future crimes. But more and likely better relief for struggling homeowners is a hard-earned victory for people across the country who have spoken out—and even gone to jail – demanding an end to Wall Street impunity.
Deborah Castillo, a member of pressure group Home Defenders League who lost her home to foreclosure said: “JP Morgan Chase should halt foreclosures while the settlement is implemented and make a good faith work with the homeowners in our communities who need fair modifications. I hope that funds from this settlement will quickly get to homeowners, who have waited far too long for relief, and are really used to help the families who are struggling and prevent the crime of more empty houses in our communities.”
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