JPMorgan Chase & Co. (JPM)’s record $13 billion deal to end probes into mortgage-bond sales may save the bank billions more because of what the agreement lacked: an explicit admission of wrongdoing.
Employees of JPMorgan and two firms it acquired knew some of the loans included in bonds didn’t meet underwriting standards, a fact not shared with buyers of those securities, the U.S. Justice Department said yesterday in a statement. That doesn’t mean the company misled investors, said Chief Financial Officer Marianne Lake, disputing how some state and federal officials characterized the deal.
JPMorgan, the biggest U.S. bank, sought to end one of the largest legal uncertainties it faced without providing fodder to private litigants. The firm is still the subject of Justice Department probes into its energy-trading business, recruiting practices in Asia and its relationship with Ponzi scheme operator Bernard Madoff.
“They’ve left themselves some wiggle room to say, ‘No we didn’t violate the law’,” said Peter Henning, a former federal prosecutor and Securities and Exchange Commission attorney who teaches law at Wayne State University in Detroit. “There is at least some acknowledgment that there were improprieties, but exactly what they were remains open, and certainly they can deny it in any specific case.”
Even as the Justice Department touted the accord as “the largest settlement with a single entity in American history,” JPMorgan’s shares rose 0.7 percent to $56.15 yesterday and added 18 cents today at 9:34 a.m. in New York. The stock climbed 38 percent in the past 12 months through yesterday, outperforming the 81-company Standard & Poor’s Financials Index and the broader S&P 500.
Legal bills fueled the bank’s first quarterly loss under Chief Executive Officer Jamie Dimon, and he has told investors the disputes will continue. Dimon, 57, had led the New York-based company to three years of record profit, including $21.3 billion for 2012, the most of any U.S. bank.
New York Attorney General Eric Schneiderman, who is co-chairman of the task force that helped secure the deal, said yesterday that the bank acknowledged it made “serious, material misrepresentations to the public.” That language was mirrored in releases from the Justice Department and the Inspector General of the Federal Housing Finance Agency.
“We didn’t say that we acknowledge serious misrepresentation of the facts,” Lake said yesterday in a conference call with analysts. “We would characterize potentially the statement of facts differently than others might.”
JPMorgan acknowledged the statement of facts -- the settlement’s official narrative of events leading up to the infractions -- without admitting violations of law, Lake said. The bank also denied any violations in an accompanying slide show.
Vendors hired by JPMorgan to grade loans that were to be packaged into bonds and sold to investors found that some were unsuitable because the borrowers had high debt-to-income ratios, and paperwork documenting income and appraisals was missing, according to the statement of facts released by the Justice Department.
Bank managers ordered mass waivers to include these loans in bonds. In one case, an employee told managers that loans shouldn’t be purchased because of their poor quality, and wrote a letter “memorializing her concerns” after the loan pools were bought, according to the document.
“How do we not interpret accepting what’s alleged in these statements of facts as not putting you at kind of a disadvantage when it comes to other litigation?” Jeffery Harte, an analyst at Sandler O’Neill & Partners LP, asked Dimon and Lake yesterday during the conference call.
“I realize it reads not entirely flattering, but that is in part how it has been articulated,” Lake said.
Separate agreements with the Federal Deposit Insurance Corp. and National Credit Union Administration, both disclosed yesterday, and an accord last month with the FHFA all contained explicit denials of wrongdoing by JPMorgan.
“They are trying to throw some barriers at all the lawyers who will be crawling out of the woodwork,” said Nancy Bush, a bank analyst who founded NAB Research LLC in New Jersey. “I don’t know how successful they’re going to be. There will be many more attempts made.”
U.S. and state officials blamed the bank for helping to cause the financial crisis, and said the settlement doesn’t shield JPMorgan or its employees from charges.
“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Attorney General Eric Holder said in a statement. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior.”
U.S. Attorney Benjamin Wagner in Sacramento, California, said a criminal investigation of the bank’s conduct in the sales of residential mortgage-backed securities began less than a year ago, and while “active and ongoing,” isn’t far enough along to say whether anyone will face charges.
“It’s too soon to know where that case would lead,” Wagner said. “Decisions about where it would actually be brought, assuming it would be made, it’s too early to say where it will take us.”
Dimon said in a statement that the settlement resolves a significant part of claims tied to mortgage-backed securities issued by JPMorgan and two firms it bought during the crisis, Bear Stearns Cos. and Washington Mutual Inc.’s bank unit. The sum is covered by reserves, and JPMorgan is cooperating with the criminal case, the bank said.
Dimon said he was surprised by costs tied to the purchase of Bear Stearns.
“It was a house on fire, it was imploding,” he said during the conference call when asked about how he views the 2008 acquisition. “We did it because we were asked to. We never expected this kind of stuff to happen.”
Terms call for JPMorgan to pay $9 billion for federal and state claims, with $2 billion to the Justice Department, $1.4 billion to the NCUA and $515.4 million to the FDIC.
The agreement includes the previously disclosed accord to end the FHFA’s 2011 lawsuit. JPMorgan will devote $4 billion to consumer relief for affected homeowners, including principal forgiveness, loan modifications and efforts to reduce blight, according to the statement.
The bank also agreed not to pursue reimbursement from the FDIC for bad loans issued by WaMu. The FDIC and JPMorgan have wrangled about who should pay claims tied to faulty mortgages issued by the failed Seattle thrift, which ranked among the biggest providers of subprime home loans before it collapsed during the financial crisis. The FDIC seized WaMu’s banking operations and sold them to JPMorgan for $1.9 billion.
While the $2 billion penalty isn’t tax deductible, the remaining $7 billion in compensatory payments are, Lake said in the conference call.
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.
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