JPMor­gan fi­nal­izes $13B set­tle­ment with gov­ern­ment

The Washington Times Daily - - Business - BY PETE YOST MARCY GOR­DON

JPMor­gan Chase & Co. has reached a record $13 bil­lion set­tle­ment with fed­eral and state au­thor­i­ties, re­solv­ing claims over the bank’s sales of low-qual­ity, high-risk mort­gage-backed se­cu­ri­ties that col­lapsed in value dur­ing the U.S. hous­ing cri­sis.

The agree­ment is the lat­est chap­ter in the burst­ing of the hous­ing bub­ble.

“With­out a doubt, the con­duct uncovered in this in­ves­ti­ga­tion helped sow the seeds of the mort­gage melt­down,” At­tor­ney Gen­eral Eric H. Holder Jr. 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.”

The set­tle­ment an­nounced Tues­day re­quires JPMor­gan to pay $9 bil­lion and pro­vide $4 bil­lion in con­sumer relief, in­clud­ing prin­ci­pal re­duc­tions and other mort­gage mod­i­fi­ca­tions for home­own­ers fac­ing fore­clo­sure.

Ac­cord­ing to a doc­u­ment filed as part of the set­tle­ment, JPMor­gan ac­knowl­edged that it reg­u­larly rep­re­sented to in­vestors that mort­gage loans in var­i­ous se­cu­ri­ties com­plied with un­der­writ­ing guide­lines. Con­trary to those rep­re­sen­ta­tions, on a num­ber of oc­ca­sions JPMor­gan em­ploy­ees knew that the se­cu­ri­ties did not com­ply with those un­der­writ­ing guide­lines, the Jus­tice Depart­ment said.

On Mon­day, the Jus­tice Depart­ment’s No. 2 of­fi­cial said too many fi­nan­cial in­sti­tu­tions had failed in their duty to en­sure that their busi­nesses were run cleanly.

Re­count­ing the con­duct com­mon to many banks, in­clud­ing JPMor­gan, Deputy At­tor­ney Gen­eral James M. Cole told the Amer­i­can Bankers As­so­ci­a­tion that too many su­per­vi­sors in­cen­tivized ex­ces­sive risk tak­ing, know­ing that risky prod­ucts “could be un­loaded down the road ... leav­ing some­one else to deal with the con­se­quences.”

The fi­nal is­sue in the set­tle­ment re­volved around the $4 bil­lion to com­pen­sate con­sumers. Some $1.5 bil­lion will be a write­down to re­duce the prin­ci­pal of home­owner loans; $300 mil­lion will en­able home­own­ers to pay less now on their mort­gages; and the re­main­der of the $4 bil­lion will go to­ward re­duc­ing mort­gage in­ter­est rates, orig­i­nat­ing new loans and help­ing re­vive blighted prop­er­ties in some of the hard­est hit ar­eas of the hous­ing cri­sis, such as Detroit. An in­de­pen­dent mon­i­tor will be ap­pointed to over­see the as­sis­tance to home­own­ers.

The agree­ment eclipses the record $4 bil­lion levied on oil gi­ant BP in Jan­uary af­ter the worst off­shore oil spill in U.S. his­tory in 2010.

Still to come is a de­ci­sion on whether the Jus­tice Depart­ment will file crim­i­nal charges against JPMor­gan. An in­ves­ti­ga­tion is un­der­way by the U.S. at­tor­ney’s of­fice in Sacra­mento, Calif.

In ad­di­tion to the $4 bil­lion to help strug­gling home­own­ers, the na­tion’s big­gest bank will pay more than $6 bil­lion to com­pen­sate in­vestors and pay the re­main­der as a fine.

JPMor­gan has said most of its mort­gage-backed se­cu­ri­ties came from Bear Stearns Cos. and Wash­ing­ton Mu­tual Inc., trou­bled com­pa­nies that JPMor­gan ac­quired in 2008.

As part of the $6 bil­lion to in­vestors, $4 bil­lion will re­solve gov­ern­ment claims that JPMor­gan mis­led mort­gage fi­nance gi­ants Fan­nie Mae and Fred­die Mac about risky mort­gage se­cu­ri­ties the bank sold them be­fore the hous­ing mar­ket crashed. That part of the deal was an­nounced Oct. 25. Fan­nie and Fred­die were bailed out by the gov­ern­ment dur­ing the cri­sis and are un­der fed­eral con­trol.

The $13 bil­lion JPMor­gan set­tle­ment amount is only about half of its record 2012 net in­come of $21.3 bil­lion, or $5.20 a share, which made it one of the most prof­itable U.S. banks last year.

Mount­ing le­gal costs from gov­ern­ment pro­ceed­ings pushed JPMor­gan to a rare loss in this year’s third quar­ter, the first un­der CEO Jamie Di­mon’s lead­er­ship. The bank re­ported Oct. 11 that it set aside $9.2 bil­lion in the Ju­lySeptem­ber quar­ter to cover the string of le­gal cases against the bank. JPMor­gan said it has placed $23 bil­lion in re­serve to cover po­ten­tial le­gal costs.

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