|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
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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