JPMorgan Chase & Co.’s (JPM) negotiations with federal and state authorities to resolve a series of investigations tied to mortgage bonds are focusing on a potential $11 billion figure, including $4 billion for consumer relief, a person familiar with the talks said.
The amount isn’t final, said the person, who asked not to be identified because the negotiations aren’t public. Those involved in the talks include the U.S. Justice Department, the Department of Housing and Urban Development and New York Attorney General Eric Schneiderman, who is co-chairman of a federal and state working group on residential mortgage-backed securities.
JPMorgan Chief Executive Officer Jamie Dimon spent two hours at the Justice Department in Washington today, to personally discuss the settlement with U.S. Attorney General Eric Holder, according to a person familiar with the meeting. Federal officials rejected a proposal from the bank earlier this week to pay between $3 billion and $4 billion to settle the probes, a separate person with knowledge of the negotiations said.
The talks are still fluid and the size of the settlement keeps changing, according to another person familiar with the matter. The people said they weren’t sure which claims may be resolved. The bank is trying to resolve as many probes as possible before the end of the third quarter on Sept. 30, according to people familiar with the bank’s thinking.
At a press conference today, Holder said only that he met with representatives of JPMorgan, declining further comment on the nature of the discussions.
“This is something that is a priority for this Justice Department, to hold accountable people who would manipulate, companies that would manipulate our financial markets for their own customers’ benefit, for the benefit of the companies,” Holder said, referring back to yesterday’s announcement of charges tied to alleged manipulation of benchmark rates.
“We have, I think, brought a substantial number of those kinds of cases over the past few years. We have matters that are under investigation and I would expect that we would be making further announcements” in the coming weeks and months, he said.
JPMorgan is seeking to negotiate a resolution to mortgage-bond investigations being conducted by federal and state authorities, including probes by U.S. attorneys in Philadelphia, Washington and Sacramento, California, according to another person briefed on the effort.
The bank has also tried to settle a $6 billion claim by the Federal Housing Finance Agency, according to the person, who also asked not to be identified because the talks are private.
Joe Evangelisti, a spokesman for the New York-based bank, declined to comment on the negotiations.
“Talks are ongoing,” Lauren Horwood, a spokeswoman for Sacramento U.S. Attorney Ben Wagner, one of the federal officials involved in the talks, said yesterday.
Holder told government negotiators that JPMorgan’s initial proposal fell far short of an acceptable payment amount, according to another person with knowledge of the case.
Adora Andy Jenkins, a Justice Department spokeswoman, declined to comment on the talks.
The Obama Administration set up the residential mortgage-backed securities working group in 2012 to coordinate legal actions targeting fraudulent underwriting activity that contributed to the financial crisis. In an outgrowth of the task force’s work, Schneiderman’s office sued JPMorgan in October over mortgage-bonds packaged by Bear Stearns Cos., which was acquired by the bank in 2008.
Schneiderman alleged that Bear Stearns deceived mortgage-bond investors about the defective loans backing the securities they bought. The firm failed to fully evaluate the loans, ignored the defects that a limited review uncovered and hid from investors that it failed to adequately scrutinize the loans or disclose their risks, according to the complaint.
At the time it was filed, the cumulative realized losses on more than 100 subprime and Alt-A securities that the bank and its affiliates sponsored and underwrote in 2006 and 2007 totaled about $22.5 billion, or about 26 percent of the original balance of about $87 billion, according to the complaint. Alt-A is a term for mortgages that typically didn’t require documentation such as proof of income.
Schneiderman’s office asserted claims under New York’s Martin Act, an almost century-old law that gives the state’s attorney general broad powers to target financial fraud. The bank denies the claims in the case, which is pending in state Supreme Court in Manhattan.
The current national settlement talks with the bank are also being driven by the working group’s efforts, one of the people familiar with the discussions said.
This week, U.S. prosecutors in California were preparing to file their own case against the bank, according to another person familiar with the matter. The U.S. Attorney’s office in Sacramento was examining whether the bank violated both civil and criminal laws, the bank said in a regulatory filing last month.
In May, the office told the bank that it had already determined that civil laws were violated in connection with offerings of securities based on subprime and Alt-A residential loans from 2005 to 2007, according to the regulatory filing.
The FHFA alleged in a 2011 lawsuit that the bank misled Fannie Mae and Freddie Mac about the soundness of mortgages backing billions of dollars of residential mortgage-backed securities. The bank didn’t disclose that a significant portion of the loans failed to adhere to underwriting standards and had poor credit quality, according to the complaint.
The number of loans for owner-occupied properties was much lower than investors were told and the bank’s disclosures misrepresented the true value of the mortgage properties, according to the complaint.
The agency said Fannie and Freddie bought $33 billion in the securities from JPMorgan and its affiliates. The bank denies the claims in the case, which is pending in federal court in Manhattan.
Last week, JPMorgan agreed to pay $920 million in penalties over $6.2 billion in losses stemming from derivatives trading by the bank’s chief investment office in London.
Traders in the office priced derivatives in such a way as to not show the extent of losses in the portfolio, the U.S. Securities and Exchange Commission said in a Sept. 19 cease-and-desist order. The losses at the unit, which was supposed to help reduce risk and manage excess deposits, forced the bank to restate publicly filed financial results.
To contact the reporters on this story: Christie Smythe in Brooklyn, New York, at firstname.lastname@example.org; Dawn Kopecki in New York at email@example.com; Laurie Asseo in Washington at firstname.lastname@example.org; Phil Mattingly in Washington at email@example.com.