JPMorgan in Pact With Ambac, Step to $4.5 Billion Mortgage Deal

  • Settlement with bond insurer is over bad-loan crisis of 2008
  • The $995 million accord now puts focus on Bank of America

JPMorgan Chase & Co. agreed to pay $995 million to resolve claims by Ambac Financial Group Inc. that it was duped into insuring mortgage bonds backed by shoddy loans, paving the way for approval of a much larger settlement between the bank and institutional investors stemming from the global financial crisis.

As part of the accord, Ambac will drop its objections to a $4.5 billion pact between JPMorgan and investors including BlackRock Inc. and Pacific Investment Management Co. centering on claims of faulty home loans. That brings the banking industry one step closer to resolving litigation over the "toxic" mortgage debt that fueled the crisis. An Ambac unit was the world’s second-biggest bond insurer in 2008 when mounting defaults on mortgages swamped it with claims. 

Ambac said Tuesday in a statement that the bank will pay $995 million to end two lawsuits the New York-based insurer filed in New York state court in 2011 and 2012 over the quality of loans underlying mortgage bonds sold by Bear Stearns & Co. JPMorgan bought Bear Stearns in 2008.

JPMorgan said in a separate statement that the pact resolves Ambac’s attempts to recover past and future payments of principal and interest on about $3.3 billion of 11 mortgage-backed security trusts sponsored by EMC Mortgage LLC, a unit of Bear Stearns. 

The settlement clears the way for a judge to approve the larger deal, Bloomberg Intelligence analyst Elliott Stein said. The question now is whether the balance of power has shifted in lawsuits Ambac has brought against Bank of America Corp. over losses almost three times as great as in the JPMorgan cases, and whether the JPMorgan settlement will lead to a resolution of that case, Mark Palmer, an analyst with BTIG LLC in New York, said in a note to investors. 

Several banks still face probes or suits by members of a Justice Department task force formed by President Barack Obama to punish Wall Street for spurring the crisis with bonds backed by faulty mortgages. Any settlements reached this year could meet or exceed a $5.1 billion agreement reached by Goldman Sachs Group Inc. earlier this month, Stein said.

Authorities have already levied penalties against the three biggest U.S. banks -- JPMorgan, Bank of America and Citigroup Inc. -- of more than $37 billion in cash and consumer relief. In those cases, the government said, the banks misrepresented to investors the quality of mortgage loans they had packaged into risky securities.

The cases are Ambac Assurance v. EMC Mortgage, 651013/2012 and 650421/2011, New York State Supreme Court, New York County (Manhattan).

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