Tuesday, October 22, 2013

DOJ and JPMorgan Chase Nearing Agreement on $13B Mortgage Fraud Penalty

Numerous reports state that the U.S. Department of Justice and JPMorgan Chase are nearing agreement on a civil settlement requiring the bank to pay $13 billion in penalties, fines, and compensation for the bank's involvement in mortgage fraud stemming from the financial panic of 2008.
 
The amount reportedly breaks down into three categories.  First, there is $6 billion that will be compensation for investor losses from the sale by JPMorgan, Bear Stearns, and Washington Mutual of mortgage securities.  Second, another $4 billion will be in the form of relief for homeowners who suffered from the mortgage practices used by the bank.  Finally, the remainder will be a fine based on mortgage securities sold by JPMorgan itself. 
 
JPMorgan purchased Bear Stearns and Washington Mutual in 2008.  While the government encouraged the purchases to help ameliorate the financial crises, JPMorgan performed its due diligence and appeared to have willingly entered into these acquisitions.  Moreover, based on JPMorgan's projections at the time of the purchases, these appear to have been profitable acquisitions for the bank. 
 
During the period of the negotiations between the bank and the government JPMorgan has tried to portray itself as free of wrongdoing, becoming involved only through the actions of the financial institutions it purchased.  Moreover, apologists for JPMorgan have suggested that the government's stance in the negotiations was turning the bank into a victim of prosecutorial zealotry.  The proposed settlement refutes these claims.  The largest amounts are assessed against JPMorgan are to make victims of that bank's unlawful actions whole and to fine JPMorgan for its misconduct.  The reports state that the government has decided not to allocate fines against misconduct by Bear and Washington Mutual because the government encouraged JPMorgan to purchase those entities.
 
Prosecutors from the Eastern District of California in Sacramento are continuing their criminal investigation of JPMorgan and individuals employed by the bank to determine whether to bring federal criminal charges.  Reports indicate that the bank attempted to obtained a deferred prosecution agreement with the Justice Department as part of the settlement, but DOJ refused.
 
The settlement may be the first domino to fall in a series of settlements.  Reports are that Bank of America, Citi, and other banks are in negotiations with the Justice Department.
 
For more about the likely settlement, please see The New York Times, http://dealbook.nytimes.com/2013/10/21/considering-the-fairness-of-jpmorgans-deal/?ref=business&_r=0, The Wall Street Journal, "J.P. Morgan Aimed to Limit Damage," Oct. 22, 2013, Page C1, and CBS This Morning, http://www.cbsnews.com/video/watch/?id=50157547n.

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