The whopping figure in discussion far exceeds the Justice Department’s largest single company settlement on record — a $3 billion deal with GlaxoSmithKline in 2011. It is also significantly higher than the $3 billion JPMorgan offered the Justice Department on Tuesday to settle the investigations.
Yet it amounts to a sliver of the losses incurred by investors who purchased mortgage securities that turned sour when the housing market crashed in 2008.
According to the person with knowledge of the talks, the settlement under discussion would include $7 billion in cash and $4 billion in relief to consumers. JPMorgan has not agreed to that amount and the conversation with state and federal authorities is ongoing, said the person, who was not authorized to speak publicly.
Talks have been ongoing for months but began to heat up this week as federal prosecutors in California were preparing to announce civil charges against JPMorgan related the sale of mortgage-backed securities between 2005 and 2007.
The full scope of the deal remains unclear, but people with knowledge of the negotiations said it may include an agreement to end a lawsuit filed by New York Attorney General Eric Schneiderman in October over shoddy mortgage securities, as well as similar federal probes.
Officials at JPMorgan and the Justice Department declined to comment.
Selling mortgage securities was a brisk business for Wall Street for many years. Banks, after issuing loans, would pool hundreds of mortgages and market the bundles as investments that could be traded just like stocks. When the housing market crashed, the securities were worthless and left investors saddled with massive losses.
JPMorgan disclosed in August that it was responding to “a number of subpoenas and informal requests” from federal and state authorities concerning every aspect of the packaging and sale of mortgage securities. That included a criminal and civil investigation by federal prosecutors in California. At the time, the company said government lawyers had concluded that JPMorgan broke federal laws in its handling of subprime and other risky residential mortgages.
Many of the probes stem from JPMorgan’s Bear Stearns unit, which the bank acquired in 2008 at the behest of the Federal Reserve.
JPMorgan chief executive Jamie Dimon has decried the government’s Bear Stearns probes in the past, insisting his bank was being punished even though its acquisition of the firm helped government efforts to save the economy. Dimon has said that JPMorgan has already paid nearly $10 billion to unwind Bear Stearns’s troubled businesses and settle litigation related to the firm.
Other crisis-era deals also continue to haunt the bank. JPMorgan still faces a lawsuit brought by the Federal Housing Finance Agency over mortgage securities sold by Bear Stearns and Washington Mutual, which the bank also snapped up during the downturn. The securities in contention were bought by the mortgage finance companies Fannie Mae and Freddie Mac, which the FHFA overseas.
The Justice Department probe of JPMorgan is part of a larger government effort to hold banks accountable for haphazard packaging and selling of mortgage bonds that nearly toppled the economy.
Investigations, however, have ramped up under the Obama administration’s federal mortgage task force — a team of federal and state attorneys assembled in 2009 to go after crimes related to the financial crisis.
In January 2012, the task force launched a working group to investigate misconduct in the mortgage-backed-securities market. Since then, the group, led by New York’s Schneiderman, has filed cases against Credit Suisse and Bank of America for allegedly misleading investors about the quality of the securities they sold.
Other federal agencies are also ratcheting up cases against Wall Street titans over faulty securities. On Monday, the National Credit Union Administration filed nine lawsuits in federal court in Manhattan over the sale of nearly $2.4 billion in mortgage securities to Southwest and Members United credit unions. The suits allege that Credit Suisse, Barclays, JPMorgan and others sold the financial cooperatives troubled loans that led to their demise.
It remains unclear whether these lawsuits and others that are expected to follow will quell criticism of the government’s effort to hold Wall Street accountable for its actions during the financial crisis. Industry experts and others following these cases have criticized the lack of criminal prosecutions of high-ranking executives. Others saymultimillion-dollar settlements could go a long way in preventing future wrongdoing.
Even if JPMorgan resolves many of its outstanding cases with the Justice Department, it will still have to contend with federal probes into its debt-collection practices and its role in the manipulation of a benchmark measure tied to interest-rate swaps.