JPMorgan Chase & Co. (JPM) resumed settlement talks with the U.S. after authorities prepared to sue the bank yesterday in California federal court alleging it misrepresented the quality of mortgage-backed securities it sold from 2005 to 2007, a person familiar with the matter said.
The government told JPMorgan it was ready to file a complaint yesterday in Sacramento, the person said. Soon after, talks restarted between the bank and Justice Department officials over a possible settlement, said the person, who asked not to be identified because the matter isn’t public.
JPMorgan is seeking 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 government took over failing mortgage-finance companies Fannie Mae and Freddie Mac in 2008. Fannie Mae and Freddie Mac, which are regulated by the FHFA, have taken $187.5 billion in federal aid since then.
JPMorgan offered to pay about $3 billion to settle an array of probes, the Wall Street Journal reported yesterday, citing a person familiar with the matter. The Justice Department pressed the bank to pay more, the newspaper said. The Financial Times said the bank is discussing a $4 billion settlement as it seeks to resolve state and federal mortgage claims. The New York Times said today that this week’s talks included proposals in which the bank would pay $3 billion to $7 billion.
Brian Marchiony, a spokesman for New York-based JPMorgan, declined to comment on settlement negotiations. Adora Andy Jenkins, a spokeswoman for the Justice Department, and Peter Garuccio, a spokesman for the 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 civil 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 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.
The New York Times reported yesterday that talks between JPMorgan and the Department of Housing and Urban Development over a wide-ranging settlement of many of the mortgage investigations broke down after the agency suggested the bank would have to pay about $20 billion. The bank rejected the $22 billion accord that would have resolved some of the investigations, the paper said.
Helen Kanovsky, HUD’s general counsel, disputed that report. While the agency has been involved in multiparty negotiations to reach a settlement with JPMorgan, “no one at this agency -- including the Secretary -- ever floated a $20 billion settlement figure,” she said in a statement. “Nor has the department’s involvement ‘effectively derailed’ settlement talks. Both of those statements are categorically false.”
The New York Times later corrected the article on its website to say a $20 billion settlement figure was discussed at the bank then rejected, and that it isn’t clear who proposed it.
The Justice Department is leading negotiations over a settlement, according to two people briefed on the matter who asked not to be identified because talks are private.
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