$13B JPMorgan deal near
A person familiar with its talks with Justice in mortgage cases speaks.
WASHINGTON - JPMorgan Chase, the nation's largest bank, has reached a tentative agreement with the Justice Department to pay $13 billion to resolve allegations that it knowingly sold faulty mortgage securities that contributed to the financial crisis, a person familiar with the talks said Saturday.
If finalized, the deal would be the largest penalty ever paid by a single company, representing a tremendous win for the government after years of public criticism over its struggle to hold Wall Street accountable for its crisis-era misdeeds.
It would also leave JPMorgan and its executives still at risk of criminal prosecution, a humbling concession. The bank emerged from the financial crisis relatively unscathed, but has struggled to shake off the vestiges of that era. Like many banks, it has been accused of selling bad residential mortgage to investors, including Fannie Mae and Freddie Mac, who lost billions when the housing market crashed.
JPMorgan and Justice have been negotiating a potential deal for months, but talks heated up a few weeks ago and eventually included direct discussions between the bank's chief executive, Jaime Dimon, and Attorney General Eric Holder Jr.
The stakes are high for both sides.
Pulling off a record settlement would be a significant accomplishment for Holder. Justice has levied multimillion-dollar fines against big banks, including HSBC and Barclays, but to lawmakers and consumer advocates, those penalties are tantamount to a slap on the wrist.
"Resolving the mortgage cases for $13 billion is a major win for the DOJ, particularly since the deal only applies to the civil case," said Thomas Gorman, a securities lawyer at Dorsey Whitney. "It also brings to account a major Wall Street player for the market crisis, something enforcement officials and the public have been looking for."
The deal could be finalized soon, according to a person familiar with the negotiations who was not authorized to speak publicly. Justice and JPMorgan are hammering out the final details, including a statement listing what the company did wrong. Such an admission of wrongdoing could be used in other legal actions against the bank.
Officials at JPMorgan and Justice declined to comment.
Selling mortgage securities was a brisk business for Wall Street for many years. Banks, after issuing loans to homebuyers, would pool hundreds of mortgages and market the bundles as investments that could be traded just like stocks. When the housing market crashed, the securities were worthless and left investors saddled with massive losses.
A key issue during the discussions has been whether JPMorgan and its executives would face criminal prosecution for allegedly knowing that the bank was selling bad mortgages, the person said.
"JP Morgan had been trying to get amnesty for criminal prosecution," the person familiar with the negotiations said. But Holder, in a phone call earlier this month with Dimon said "that was a nonstarter," the person said.
The full scope of the deal remains unclear, but it would include $4 billion in relief to homeowners, including lowering how much they owe on their mortgage. Another $4 billion would go to the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, to resolve allegations that JPMorgan made false statements and omitted facts about the quality of the securities it sold the mortgage finance twins. Fannie Mae and Freddie Mac, which purchase and insure mortgage securities, received $188 billion in taxpayer bailout during the crisis.
JPMorgan is among the 18 financial firms sued by FHFA in 2011 to recoup losses sustained by Fannie and Freddie from securities bundled with poorly underwritten home loans. To date, the agency has settled three of those cases, including a $885 million deal with UBS in July.
The deal would also end a California probe as well as a separate lawsuit filed by New York Attorney General Eric Schneiderman in October over shoddy mortgage securities.
The Justice Department is still pursuing a criminal investigation of the trading loss and a possible cover-up at the bank. Two of the bank's former traders in London are facing criminal charges. The SEC also is investigating individuals involved in the trading loss.