JPMorgan Chase has resolved the last obstacles to a record $13 billion settlement of civil state and U.S. probes over the sale of mortgage bonds, clearing the way for a deal today after months of negotiations, two people briefed on the matter said.
The accord includes a previously disclosed $4 billion settlement to end a 2011 Federal Housing Finance Agency lawsuit, said one of the people, who asked not to be identified because the discussions are private.
While the deal would mark the largest amount paid by a financial firm in a settlement with the U.S., the Justice Department is still probing JPMorgan's recruiting practices in Asia, energy trading and its relationship with Ponzi scheme operator Bernard Madoff. The New York-based bank has tapped $8 billion of $28 billion in reserves set aside since 2010 to cover legal costs.
"It's good they're getting this done, but it's a fairly narrow band of cases they are settling," said Jacob Frenkel, a former Securities and Exchange Commission lawyer who's now a partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. "There are still other open investigations that this doesn't address, and those will run their course."
JPMorgan agreed to drop litigation against the Federal Deposit Insurance Corp. related to some bonds sold by Washington Mutual Inc., the people said. The bank battled with the FDIC over who should pay some liabilities from the failed Seattle thrift that the agency placed into receivership in 2008 while selling assets to JPMorgan. The deal doesn't resolve a criminal probe led by the U.S. Attorney's office in Sacramento, California, into the company's mortgage-bond sales.
JPMorgan, led by Chief Executive Officer Jamie Dimon, announced a tentative $4.5 billion deal last week with 21 institutional investors, including Pacific Investment Management Co., to settle separate claims that the lender and its subsidiaries sold faulty mortgage bonds. The bank may seek reimbursement from the FDIC for claims against WaMu from those investors, two people familiar with the matter said.
In addition to the U.S. probes, the $13 billion accord will resolve cases with five states, including New York, California and Illinois, one person said, without identifying the other two.
The amount, which increased from an $11 billion proposal in September, represents more than half of JPMorgan's net income last year. Only seven companies in the Dow Jones Industrial Average earned more than $13 billion in 2012, data compiled by Bloomberg show.
"This would be a huge settlement and there are more to come," said Michael Bresnick, who was executive director of President Barack Obama's Financial Fraud Enforcement Task Force until August and is now a partner at Stein Mitchell Muse & Cipollone LLP in Washington. "These cases take time, and you've got to put in the time, the energy and the resources and put the work in, and we're starting to see those results now."
Obama ordered the creation of the task force last year to coordinate a crackdown on deceptive underwriting practices that contributed to the financial crisis.
The settlement, which includes a $2 billion fine, will end civil investigations by the Justice Department as well as lawsuits by the FDIC and National Credit Union Administration, people briefed on the talks said.
Andrew Gray, a spokesman for the FDIC, JPMorgan's Brian Marchiony and Brian Fallon at the Justice Department said they couldn't comment because the negotiations are confidential.
The consumer-relief portion of the accord, negotiated over the weekend by Associate Attorney General Tony West and U.S. Housing and Urban Development Secretary Shaun Donovan, requires JPMorgan to hire an independent monitor and provide the entire $4 billion by the end of 2016, one of the people said.
JPMorgan's costs include at least $1.5 billion in principal writedowns for struggling homeowners with federally backed loans, the person said. Of that, $1.2 billion would be for first lien principal writedowns. At least $300 million must go toward forbearance, in which banks shift loan terms to account for a change in a debtor's income, the person said.
An additional $2 billion would fund interest-rate reductions of existing loans, new loans or loan originations that JPMorgan would be required to keep in its portfolio, the person said. The bank also would receive credit for anti-blight efforts, such as the costs of demolishing vacant homes and absorbing the mortgages of such properties the bank has yet to foreclose on, the person said.
If JPMorgan doesn't provide the entire $4 billion by the end of 2016 then the bank would be required to pay any leftover portion to the government or a nonprofit, the person said.
U.S. prosecutors in California overseeing parallel civil and criminal investigations prepared to file a case against JPMorgan in late September, a person familiar with the matter said. The threat of that suit helped restart negotiations between the bank and senior Justice Department officials over a broader pact that would incorporate several state and federal probes, the person said.
Proposed settlement amounts swung by billions of dollars during the negotiations, people with knowledge of the talks said. At one point, federal officials rejected the bank's offer to pay $3 billion to $4 billion, one person said at the time. The talks spanned a government shutdown in October.
Dimon, 57, negotiated outlines of the deal in a call with Attorney General Eric Holder on Oct. 18 following a face-to-face meeting in Washington Sept. 26, people familiar with the matter said at the time. The bank is trying to bundle costs for as many legal cases as possible into the second half of this year, one of the people said.
The $13 billion agreement adds to $1.8 billion in fines and other payments JPMorgan has agreed to since July to end investigations unrelated to mortgages. That includes more than $1 billion for probes of a record trading loss last year, $410 million to settle accusations it manipulated energy markets and $389 million to resolve claims it unfairly charged customers for credit-monitoring products.
Two former employees in London were indicted Sept. 16 in the U.S. on charges including securities fraud and conspiracy in connection with the more than $6.2 billion trading loss on derivatives last year. The SEC's investigation of individuals remains open, as does the Federal Bureau of Investigation's criminal probe of the loss. The FBI also is examining the bank's energy-trading operations and hiring practices in Asia.
In anticipation of today's deal, JPMorgan took a $7.2 billion charge for expenses tied to regulatory matters and litigation in the third quarter, leading the bank to announce a $380 million loss on Oct. 11. Days after the surprise loss was announced, Laban P. Jackson, a JPMorgan board member, voiced support for Dimon, calling him "the best manager I've ever seen."
The mounting fines and other sanctions are eroding JPMorgan's profit for the year and placing the firm's $6 billion share-repurchase program at risk, Charles Peabody, an analyst at Portales Partners LLC, wrote in a Sept. 25 note to investors. Analysts' average estimate for JPMorgan's full-year profit dropped 18 percent in the month through Oct. 21 as talks on the mortgage-bond settlement progressed, according to data compiled by Bloomberg.
The six biggest U.S. banks, led by JPMorgan and Charlotte, North Carolina-based Bank of America Corp., have piled up more than $100 billion in legal costs since the financial crisis, a figure that exceeds all of the dividends paid to shareholders in the past five years, according to data compiled by Bloomberg.