JPMorgan Employee Said to Be Cooperating in RMBS Probe

A JPMorgan Chase & Co. (JPM) employee is cooperating with federal investigators examining whether the bank knew the mortgage bonds it sold were of poor quality, a person familiar with the probe said.

The JPMorgan employee told her superiors at the bank they were vastly overstating the quality of mortgages packaged into securities, according to the person, who asked not to be identified because the matter isn’t public. The Justice Department also has documents showing JPMorgan was aware it was selling residential mortgage-backed securities of poor quality, the person said.

The disclosure of a cooperator comes as the lender is in talks to pay about $11 billion to end investigations into its mortgage-bond sales practices by state and federal authorities, according to people familiar with the talks, who requested anonymity because the negotiations are private. The discussions are fluid as is the size of a possible settlement, the people said.

The Justice Department is under pressure from U.S. Senator John McCain to hold individual executives personally accountable for any wrongdoing at the bank. McCain, the ranking Republican on a Senate subcommittee that probed JPMorgan’s record trading loss last year, sent a letter yesterday to Attorney General Eric Holder, criticizing Holder’s Sept. 26 meeting with JPMorgan Chief Executive Officer Jamie Dimon.

Adora Andy Jenkins, a Justice Department spokeswoman, and Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on the whether the government had obtained a cooperating witness.

The cooperating witness was reported earlier by the Wall Street Journal.

California Prosecutors

Last week, U.S. prosecutors in California were preparing to file their own case against the bank, a person familiar with the matter said. 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 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.

To contact the reporters on this story: Laurie Asseo in Washington at lasseo1@bloomberg.net; Tom Schoenberg in Washington at tschoenberg@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Steven Komarow at skomarow1@bloomberg.net

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