JP Morgan Chase to Pay $13 Billion for MBS, Loan Claims

It is being billed as the largest single-institution settlement arising from the financial crisis.  JPMorgan Chase (JPM) has agreed to pay $13 billion dollars to resolve multiple investigations involving its mortgaged backed securities (MBS) and other derivatives.  The civil settlement however is said to have no bearing on other ongoing criminal investigations of the bank.

While there has been no official release from the Department of Justice (DOJ) which negotiated the settlements or from JP Morgan itself, it is widely reported that the settlement includes $9 billion in fines and $4 billion in relief for consumers.   Reuters is reporting that 80 percent of the settlement involves investigations of the mortgage business of Washington Mutual and Bear Stearns, which were both acquired by JPM.  Others are reporting that the $4 bln in consumer relief arises out of claims from the Federal Housing Finance Agency that the bank sold improperly vetted mortgages to Freddie Mac and Fannie Mae, loans which eventually defaulted.   

The Washington Mutual and Bear Stearns claims involved activities at those companies between 2005 and 2007.  These investigations had been a major sticking point for Chase which maintained they should not be held responsible for the actions of those companies which the bank acquired after those dates.  JPM Chief Executive Jamie Dimon has claimed that his company acquired Bear Stearns as "a favor" to the Federal Reserve at the height of the financial crisis.

JP Morgan had most recently offered $11 billion to end the suits but insisted that a non-prosecution agreement that would also terminate a federal criminal investigation in Sacramento be included.  It was reported that Dimon held telephone talks with Attorney General Eric Holder this past week which resulted in the additional $2 billion payment but that Holder refused to budge on the criminal action.  The settlement also resolves a separate case in which New York Attorney General Eric Schneiderman had sued the bank over deceptive practices in Bear Stearns sales of mortgage bonds.  It may involve the termination of other investigations as well.

This is only the latest in a series of recent legal blows leveled at the bank's finances.  JPM recently paid $1 billion in penalties in the so-called "London Whale" trading scandal in which it also lost $6 billion and $80 million to the Consumer Financial Protection Bureau over charges of unfair credit card billing practices (in addition to $309 million set aside for consumer claims).  Last summer it agreed to a $410 million dollar settlement over charges it manipulated electricity prices in two regions of the country.  The firm is also being investigated for its involvement in the Libor rate fixing probe and for alleged bribery of officials in China. 

The legal problems caused JPM to post a third quarter loss of $380 million, its first in nine years.  It says it is holding $23 billion in reserves for other potential legal expenses, an amount which Bloomberg says could fall as much as $6 billion below what could be needed in a worst-case scenario.  JPM stock, which closed last week at more than triple its $14.50 March 2009 low, was down $0.16 to $54.14 in early morning trading.

There are also rumors this morning that FHFA is seeking another $6 billion from Bank of America to settle claims the banks sold faulty mortgages to Fannie Mae and Freddie Mac which are under federal conservatorship.  Both FHFA and the bank have thus far refused comment.