JPMorgan Chase and the US Department of Justice have reached a tentative US$13 billion settlement over the bank’s questionable mortgage practices leading up to the financial crisis, people briefed on the talks said on Saturday. It would be a record penalty that would cap weeks of heated negotiating and underscore the extent of the bank’s legal woes.
The deal — which the Justice Department took the lead in negotiating and which came together after a Friday night telephone call involving US Attorney General Eric Holder and JPMorgan chief executive Jamie Dimon — would resolve an array of state and federal investigations into the bank’s sale of troubled mortgage investments. That type of investment, securities typically backed by subprime home loans, was at the heart of the US’ financial crisis.
While the deal would put those civil cases to rest, it would not save JPMorgan from a parallel criminal inquiry from federal prosecutors in California, the people briefed on the talks said. Under the terms of the preliminary deal, the bank would also have to assist prosecutors with an investigation into former employees who helped create the mortgage investments, the sources said.
The US$13 billion deal, which could still fall apart over issues like how much wrongdoing the bank is willing to acknowledge, would represent something of a reckoning for Wall Street, whose outsize risk taking in the mortgage business nearly toppled the US economy in 2008.
It might also provide a measure of catharsis to the investing public, which suffered billions of dollars in losses from buying bad mortgage securities.
For the Justice Department, often criticized for being soft on big banks, the deal suggests that US President Barack Obama administration’s crackdown on Wall Street has gained some momentum in recent months.
People familiar with the case say that the hedge fund is negotiating a plea deal that would force it to plead guilty to criminal misconduct and pay more than US$1 billion in penalties.
The cost to JPMorgan — the US’ biggest bank — goes beyond the bottom line. The settlement would deal a blow to the reputations of the bank and of Dimon, who steered JPMorgan through the crisis without a quarterly loss or major government scuffle.
Now, Dimon’s tenure is engulfed in turmoil, the consequence of fighting a multifront battle with federal authorities scrutinizing everything from a US$6 billion trading loss in London last year to the bank’s hiring of well-connected employees in China.
Some defense lawyers question whether Washington is going too far in demanding that sum. A US$13 billion penalty would be more than half what JPMorgan earned in profits last year.
The lawyers also said that some of the mortgage securities in question are not JPMorgan’s. Rather, the bank inherited the liabilities when it bought Bear Stearns and Washington Mutual in 2008, at the height of the financial crisis.
If approved, the penalty would surpass other major Wall Street settlements and represent the largest that a single company has ever paid in settling with the Justice Department.