JPMorgan Chase, seeking to avert a wave of litigation from the government, is negotiating a multibillion dollar settlement with state and federal agencies over the bank’s sale of troubled mortgage securities to investors in the run-up to the financial crisis.
During settlement talks this week, proposals emerged that would require JPMorgan to pay between $3 billion and $7 billion, people briefed on the negotiations said. The settlement, the people said, might also require JPMorgan to provide some financial relief for struggling homeowners. Although the amount is still in flux, it is clear that any deal would dwarf the size of other settlements the bank has reached to resolve separate regulatory issues.
The talks, which involve the Justice Department, the Department of Housing and Urban Development and the New York attorney general’s office, continued Wednesday without a final deal. The people briefed on the negotiations, who were not authorized to speak publicly, cautioned that terms were shifting and that the talks could fall apart.
Aside from negotiating the size of a fine, the people said, the talks are centered on which investigations and pending lawsuits to sweep into the potentially wide ranging settlement. The pact could resolve investigations led by a specialized group at the Justice Department focused on mortgage securities cases. It could also include lawsuits filed by New York Attorney General Eric Schneiderman and the Federal Housing Finance Agency. The agency is focused on mortgage securities that JPMorgan sold to Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., the government-controlled housing finance giants.
The negotiations this week appeared to delay a lawsuit from the U.S. attorney’s office for the Eastern District of California. The office, the people said, initially planned to sue JPMorgan over accusations that the bank flouted federal laws with its sale of subprime mortgage securities from 2005-07. It is unclear whether the Justice Department would fold that case into a broader settlement.
The negotiations reflect the depth of JPMorgan’s legal woes.
The bank faces investigations from at least seven federal agencies, several state regulators and two foreign governments. In addition to the scrutiny of its crisis-era mortgage business, the investigations involve JPMorgan’s debt-collection practices and its hiring of the children of Chinese officials.
As it confronts the investigations, JPMorgan faces a strategic dilemma. If it settles with the authorities, the bank must pay large sums to the government. But if it fights, the bank might anger those authorities, prompting years of costly litigation.
Last week, JPMorgan opted for the conciliatory approach. Taking an initial step toward resolving its regulatory problems, the bank struck a $920 million settlement over a $6 billion trading loss in London last year.
The settlement resolved inquiries from four agencies: the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve and the Financial Conduct Authority in London.
In their orders, the regulators highlighted “severe breakdowns” in internal controls surrounding the losses. The bank, regulators said, failed to prevent a group of traders in London from amassing the risky bet. And when losses mounted, authorities said, the traders “inflated the value” of their positions to mask their losses.
Although no executive was charged in the cases, JPMorgan took the unusual step of acknowledging that it had violated federal securities laws. The traders, who denied wrongdoing, face civil and criminal charges.
“We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them,” Jamie Dimon, the bank’s chief executive officer, said in a statement last week.
The bank added that “the settlements are a major step in the firm’s ongoing efforts to put these issues behind it.”
Yet the JPMorgan losses still face scrutiny from the Commodity Futures Trading Commission. The agency, which suspects that the trading was so large that it manipulated the market for financial contracts known as derivatives, was not part of last week’s settlement and is continuing to negotiate with the bank.
The wrangling over the mortgage investigation also has persisted. Negotiations have occurred in spurts, with various sums being proposed by both the government and the bank.
Business, Pages 25 on 09/26/2013