J.P. Morgan Chase & Co. has reached a tentative deal to pay a record $13 billion to the Justice Department to settle a number of outstanding probes of its residential mortgage-backed securities business, according to a person familiar with the decision.Is This a Fair Deal?
The deal, which was struck Friday night, doesn’t resolve a continuing criminal probe of the bank’s conduct, which could result in charges against individuals or the bank itself and possibly increase the penalty tab. The two sides continued to disagree over an admission of wrongdoing that would end the criminal probe and decided instead to resolve the civil allegations related to the mortgage securities.
The deal includes $4 billion to settle claims by the Federal Housing Finance Agency that J.P. Morgan misled Fannie Mae and Freddie Mac about the quality of loans it sold them in the run-up to the 2008 financial crisis, another $4 billion in consumer relief, and $5 billion in penalties paid by the bank, according to a second person close to the talks. How the consumer relief and penalties get dispersed and distributed is largely up to the government, and those details are still unclear, this person said.
The tentative settlement comes as J.P. Morgan tries to put as many legal woes behind it as possible. Earlier this week, J.P. Morgan agreed to pay $100 million and acknowledge wrongdoing to settle allegations by the Commodity Futures Trading Commission related to its botched “London whale” trades. Last month, the bank agreed to pay $920 million to settle similar charges with U.S. and U.K. regulators related to that 2012 trade.
The task force issued a series of subpoenas to various financial companies, seeking internal documents. Those documents held a number of promising leads, one of which was assigned to federal prosecutors in Sacramento.
Investigators in that case discovered an email by a bank employee, warning her higher-ups that the bank was vastly overstating the value of the mortgages being securitized, according to people familiar with the probe. That employee, who has since left the company, has been cooperating with federal prosecutors, who expect to call her as a witness if the case ever goes to trial, according to people familiar with the case.
While the Justice Department considers the evidence in that case to be strong, officials at the bank strongly disagree, according to people familiar with the negotiations.
In late September, as the Justice Department neared its own deadline to file a civil lawsuit in the case, the bank offered $3 billion to settle the case. Attorney General Eric Holder rejected that offer, and government lawyers prepared to file the suit. The bank then offered billions more, if the government was willing to throw into the settlement separate cases, raising the total price and resolving more of the bank’s legal headaches.
As the negotiations intensified in September, Mr. Dimon sought a face-to-face meeting with Mr. Holder to try to resolve the remaining sticking points. The two met Sept. 26 at the Justice Department, but the meeting failed to settle the outstanding issues. As talks continued over the remaining weeks, the size of the deal swelled, but the two sides continued to disagree over an admission of wrongdoing that would end the criminal probe.
On Friday night, Mr. Dimon and Mr. Holder decided they were just not going to come to terms on the criminal issue–and take the deal on the terms where they did agree.
For starters, I am astonished at the massive settlement. $13 billion sounds huge (and it is compared to the typical whitewashing affairs we see).
However, things could have been much worse.
CNN Money notes JPM held "$23 billion in reserves for potential litigation expenses. In a footnote to its SEC filing, the bank said legal costs could be nearly $6 billion above that figure in a worst case scenario."
Perhaps $23 billion, $40 billion, or any amount that wipes out JP Morgan litigation reserves is "fair".
Clearly "fair" is in the eyes of the beholder. I will consider it "fair" if executives of the largest banks are tried and convicted in criminal court. Don't count on it. As astonished as I was about the amount of the settlement, I will be even more astonished if any bank executives are criminally convicted.
Mike "Mish" Shedlock