JPMorgan’s $13 billion settlement deal with Justice Dept. at risk of falling apart


A flag with the JPMorgan Chase & Co. logo flies in front of the company's offices in New York. Settlement talks between the Justice Department and JPMorgan Chase are in danger of breaking down. (Victor J. Blue/Bloomberg News)

Settlement talks between the Justice Department and JPMorgan Chase are in danger of breaking down over the bank’s demands that it avoid future criminal charges and that another government agency pay some of the $13 billion price tag, according to a person familiar with the negotiations.

Federal prosecutors have been working with JPMorgan for months to resolve allegations that the bank knowingly sold securities made up of low-quality mortgages in the lead-up to the financial crisis. As of last week, the nation’s largest bank had agreed to a tentative $13 billion settlement that would expunge multiple government probes. Details of the agreement were being hashed out, but now the sides have reached an impasse.

Officials at the Justice Department and JPMorgan declined to comment.

Troubles came to a head Sunday night, when attorneys for JPMorgan proposed a deal that would give the bank protection from future criminal investigation, according to a person familiar with the talks who was not authorized to speak publicly.

Attorney General Eric H. Holder Jr. has long refused to grant the bank a waiver from criminal prosecution, reinforcing the point in a face-to-face meeting with JPMorgan chief executive Jamie Dimon. Federal prosecutors assumed that aspect of the deal was settled and were bothered when attorneys asked that the bank be released from future criminal prosecution, the person said.

Another person familiar with negotiations played down the dispute, saying the bank is not seeking to be released from future criminal charges.

There remains a standoff over whether JPMorgan or the Federal Deposit Insurance Corp. is responsible for losses on mortgage securities issued by Washington Mutual, the failed bank that JPMorgan bought out of receivership for $1.9 billion in 2008, according to people familiar with the negotiations. Some of those securities are a part of the complaints that JPMorgan is trying to resolve in its settlement with the Justice Department.

JPMorgan has argued that it is not responsible for the bad mortgage securities issued by Washington Mutual and that the FDIC, which put the bank in receivership, should cover the cost of those losses. But the FDIC said JPMorgan took on all of those liabilities when it purchased the bank.

Several investors, including Deutsche Bank, have sued both JPMorgan and the FDIC for damages from WaMu’s alleged breach of contract over mortgages bundled into securities. The Justice Department insists that language be included in the settlement that bars JPMorgan from passing losses back to the FDIC, according to a person familiar with the talks.

“Given the fact that JPMorgan initially acknowledged that it acquired the liabilities, it would make a mockery of the FDIC as receiver if creditors of the WaMu estate were to bear the cost,” said Joshua Rosner, managing director of the research firm Graham Fisher & Co. “It would undermine the FDIC’s role in resolving too-big-to-fail firms under Dodd-Frank.”

Officials at the FDIC declined to comment.

The Federal Housing Finance Agency, one of the parties at the table in the Justice Department talks, on Friday resolved its portion of the settlement in a $5.1 billion agreement with JPMorgan.

The housing agency, which regulates Fannie Mae and Freddie Mac, sued the bank in 2011 for selling the mortgage finance twins faulty securities that resulted in billions of dollars of losses when the housing market crashed.

In its deal with JPMorgan, the FHFA prevented the bank from seeking reimbursement for the WaMu liabilities from the FDIC’s deposit insurance fund but left open the possibility of JPMorgan tapping money left over from the receivership process. The $2.7 billion left in that fund is supposed to cover claims from WaMu creditors, who have been waiting for five years to be paid.

If the tentative deal falls apart, the civil and criminal lawsuits against the bank will probably proceed. Negotiations began to heat up last month as federal prosecutors in Sacramento were preparing to announce civil and criminal charges against JPMorgan related the sale of mortgage-backed securities between 2005 and 2007.

Selling mortgage securities was a brisk business for Wall Street for many years. Banks, after issuing loans to home buyers, would pool hundreds of mortgages and market the bundles as investments that could be traded like stocks. When the housing market crashed, the securities were worthless and left investors saddled with massive losses.

Danielle Douglas covers the banking industry for The Washington Post.
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