JPMorgan Chase resumed settlement talks with the U.S. as it was preparing to sue the bank in California federal court alleging it misrepresented the quality of mortgage-backed securities it sold from 2005 to 2007, according to a person familiar with the matter.
The government informed JPMorgan it was ready to file a complaint today in Sacramento, the person said. Shortly after, talks between the bank and Justice Department officials over a possible settlement restarted, said the person, who asked not to be identified because the matter isn't public.
JPMorgan wanted to negotiate an accord resolving mortgage- bond investigations being conducted by federal and state authorities, including probes by the U.S. attorneys in Sacramento, Philadelphia and Washington, according to another person briefed on the effort.
The bank had also tried to settle a $6 billion claim by the Federal Housing Finance Agency and an investigation by New York Attorney General Eric Schneiderman, who sued the company in October over mortgage bonds packaged by Bear Stearns Cos., which JPMorgan acquired in 2008, according to the person, who asked not to be identified because the talks are private.
The FHFA sued the bank and 17 other lenders two years ago over faulty mortgage bonds. The agency sought to recoup some of the losses taxpayers were forced to cover when the federal government took over failing mortgage-finance companies Fannie Mae and Freddie Mac in 2008. Fannie Mae and Freddie Mac, which are regulated by FHFA, have taken $187.5 billion in federal aid since then.
Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on settlement negotiations. Adora Andy Jenkins, a spokeswoman for the U.S. Justice Department, and Peter Garuccio, a spokesman for FHFA, also declined to comment.
U.S. prosecutors in Sacramento had commenced criminal and civil investigations into the securities backed by crisis-era loans, the bank disclosed in an August regulatory filing. Investigators already had concluded that JPMorgan violated federal securities laws stemming from its sales of securities based on loans made to high-risk borrowers and loans that didn't require documentation proving income, the bank said.
JPMorgan last week admitted to violating federal securities laws and agreed to pay about $920 million in connection with more than $6.2 billion in trading losses at its London offices. The U.S. Securities and Exchange Commission said senior managers at the bank knew in April 2012 that its chief investment office in London was using aggressive valuations that hid losses.
The U.S. Justice Department is still investigating the trading loss.
The probe of the bank's securities sales stems from the work of an Obama administration task force set up to investigate causes of the financial crisis. The group includes U.S. Attorney Ben Wagner in Sacramento and Schneiderman.
In the Bear Stearns complaint, Schneiderman alleged that investors were deceived about defective loans backing securities they bought.
The bank also faces lawsuits by the Federal Home Loan Bank of Pittsburgh and other buyers of the mortgage-backed securities it sold.
The U.S. is investigating JPMorgan under the Financial Institutions Reform Recovery and Enforcement Act, according to another person. FIRREA allows the Justice Department to pursue civil remedies.
The California probe is focused on loans and mortgage- backed securities put together by JPMorgan itself, not the ones acquired when the company bought Bear Stearns's and Washington Mutual Inc.'s banking operations in 2008, according to a person briefed on the matter.