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News : US Economy Last Updated: Oct 21, 2013 - 10:49 AM


JP Morgan Chase agrees $13bn settlement with US Department of Justice
By Finfacts Team
Oct 21, 2013 - 3:23 AM

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James Dimon, chairman and CEO, JP Morgan Chase & Co., speaks during the session 'The Next Shock: Are We Better Prepared?' at the Annual Meeting 2011 of the World Economic Forum in Davos, Switzerland, January 27, 2011. © World Economic Forum swiss-image.ch/Photo by Sebastian Derungs

JP Morgan Chase & Co, America's biggest bank, reached a tentative deal this weekend to pay $13bn to end a number of civil investigations into its sale of mortgage securities before the 2008 financial crisis. However, a separate and potentially more serious criminal probe into the bank and its executives will continue.

The New York Times reports that  "on September 24, four hours before the Justice Department was planning to hold a news conference to announce civil charges against the bank over its sale of troubled mortgage investments, Mr. Dimon (Jamie Dimon, chairman and CEO) personally called one of Attorney General Eric H. Holder Jr.’s top lieutenants to reopen settlement talks, people briefed on the talks said. The rare outreach from a Wall Street CEO scuttled the news conference and set in motion weeks of negotiations that have culminated in a tentative $13bn deal, according to the people briefed on the talks."

The Wall Street Journal says the proposed pact includes $4bn to settle claims by the Federal Housing Finance Agency that JP Morgan misled federal mortgage guarantors, Fannie Mae and Freddie Mac about the quality of the mortgage securities it sold them, another $4bn in consumer relief, and $5bn in penalties paid by the bank, according to people familiar with the deal. But the Journal says the two sides remain apart on several issues related to the civil settlement, including whether the bank should have to admit that it didn't follow its own due-diligence standards in packaging the mortgages into securities it could sell, according to people familiar with the discussions.

In 2008, the bank had acquired Bear Stearns, a failing investment bank, and Seattle based Washington Mutual, a home loans operation, with the cooperation of US regulators.

The NYT says the share price rose recently on news that JPMorgan would set aside $23bn for its legal headaches. It also said the deal might also embolden the Justice Department and set a precedent for the agency’s investigations of Wall Street. Using the JPMorgan case as a template, and relying on a law that extends the legal deadline for filing certain financial fraud cases to 10 years from five, the Justice Department is planning to take action against other big banks suspected of selling troubled mortgage securities.

Last week, the Commodity Futures Trading Commission announced that JPMorgan Chase had agreed to pay $100m and admit wrongdoing to settle an investigation into market manipulation involving the bank’s multibillion-dollar trading loss in London. Last month other regulators fined teh bank $920m.

Prof Peter Morici of the University of Maryland, comments - -"JP Morgan's record $13bn tentative settlement with the Justice Department concerning misrepresented residential mortgage-backed securities does not absolve from criminal charges senior bank officials or the bank as an institution.

JP Morgan could be dismembered if several senior officers are found guilty of criminal charges or the bank as an institution engaged in fraud or other criminal activities. The resulting crippling or breakup of JP Morgan would have grave consequences for major corporations and the broader economy that rely on the institution as their primary banker, and those firms' CFOs would do well to start shopping their business elsewhere.

Also, other Wall Street institutions, such as Goldman Sachs, marketed similarly shaky securities. It must be asked: Why has all this taken five years? Why was JP Morgan singled out for such harsh treatment? Does this episode have parallels to the federal suit against Standard and Poor's, which downgraded US debt in 2011 and then was singled out among bond rating agencies by the Administration?

Much of JP Morgan's legal problems stem from its acquisitions of Bear Stearns and Washington Mutual, whereas Goldman Sachs' mortgage securities problems were manufactured within its own confines. Again why is JP Morgan treated so much more harshly, and without regard for the broader macroeconomic effects?

Much of Wall Street backed Barack Obama's bid for the presidency in 2008, and subsequently maintained distance for the 2012 campaign. Goldman Sachs has continued close ties to the Administration and the Federal Reserve.

All this raises serious questions about the exercise of prosecutorial discretion by Eric Holder's Justice Department."


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