JPMorgan Chase & Co has agreed to pay US$13 billion in a landmark settlement and acknowledged that it misled investors about the quality of risky mortgage-backed securities ahead of the 2008 financial crisis.
The settlement announced on Tuesday with the US Department of Justice is the largest ever between the US government and a corporation. It also included settlements with New York, California and other states.
JPMorgan was among the major banks that sold securities that plunged in value when the housing market collapsed in 2006 and 2007. Those losses triggered a financial crisis that pushed the US economy into the worst recession since the 1930s.
The deal was reached after months of negotiations and could serve as a template for similar settlements with other big banks.
As part of the deal, JPMorgan agreed to provide US$4 billion in relief to homeowners affected by the bad 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,” US 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 is to pay US$2 billion in civil penalties to the US federal government and about US$1 billion to New York state.
Another US$6 billion will go toward compensating investors.
In a statement, JPMorgan chief executive officer Jamie Dimon said that the settlement covers a “very significant portion” of the bank’s 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 US$4 billion levied on oil giant BP in January over the 2010 offshore oil spill, which was the worst in US history.
While the US$13 billion that JPMorgan is paying is a staggering sum, it represents only about 60 percent of the bank’s US$21.3 billion net income reported for last year.
And JPMorgan has already set aside US$23 billion this year to cover the settlement and other costs related to its legal troubles.
JPMorgan could still face criminal charges. An investigation is under way by the office of US Attorney Benjamin Wagner in Sacramento, California, focused primarily on JPMorgan employees.
Wagner told a news conference on Tuesday that the activity described in the settlement was “symptomatic of the recklessness on Wall Street.”
Asked about a timeframe for resolving the criminal probe, Wagner said, “You’ll just have to stay tuned. We’re going to keep plugging away.”
According to the Justice Department’s statement of facts agreed to by JPMorgan, many of the mortgage loans were referred to inside JPMorgan as “rejects.”
Those loans were missing appraisals or proof of borrower’s income, employment or assets.
In one review, consultants hired by the bank found that more than a quarter of loans in a pool of tens of thousands were “rejects.”
Yet JPMorgan ultimately accepted half of those rejects and re-graded them as acceptable.
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.
Mounting legal costs from government proceedings pushed JPMorgan to a rare loss in this year’s third quarter, the first under Dimon’s leadership.
On Friday last week, the company announced it had reached a US$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.