JPMorgan Reaches Record $13 Billion Mortgage Settlement

JPMorgan Chase & Co. will pay a record $13 billion to resolve U.S. Justice Department probes into the bank’s sale of mortgage bonds that officials said helped feed the financial chaos of 2008.

The accord settles allegations that JPMorgan, the biggest U.S. lender by assets, misled investors and the public when it sold bonds backed by faulty residential mortgages, according to Justice Department statement today. U.S. and state officials blamed the bank’s actions in the statement for helping to cause the credit crisis, and said the settlement doesn’t shield JPMorgan or its employees from criminal charges.

“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Attorney General Eric Holder said in the 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.”

Jamie Dimon, JPMorgan’s chief executive officer, said in a separate statement that the settlement resolves a significant portion of claims tied to mortgage-backed securities issued by the lender and two firms it bought during the credit crisis, Bear Stearns Cos. and Washington Mutual Inc.’s bank unit. The sum is covered by reserves, and JPMorgan is cooperating with the Justice Department’s criminal case, the bank said.

Misleading Investors

JPMorgan rose 0.7 percent to $56.15 today in New York. The stock returned 79 percent including dividends since the start of 2012, outpacing the 68 percent total return for the 81-company Standard & Poor’s 500 Financials Index and 37 percent for the Dow Jones Industrial Average.

JPMorgan misled investors by regularly misrepresenting that the mortgage loans in various securities complied with underwriting guidelines, according to the Justice Department statement. Employees knew the loans didn’t meet standards and let the sales proceed anyway, according to the agency.

New York Attorney General Eric Schneiderman said the bank acknowledged “serious, material misrepresentations to the public.” Chief Financial Officer Marianne Lake disputed that idea when questioned during a conference call with analysts.

“We didn’t say that we acknowledge serious misrepresentation of facts,” Lake said. “We do acknowledge the statement of facts but obviously don’t admit to any violation of law.”

Payment Terms

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 National Credit Union Administration and $515.4 million to the Federal Deposit Insurance Corp.

The state of New York will receive $613.8 million, California will get $298.9 million, Illinois will get $100 million, Delaware will get $19.7 million and Massachusetts will receive $34.4 million, according to the Justice Department’s statement.

The agreement includes a previously disclosed accord to end a 2011 Federal Housing Finance Agency lawsuit. The bank 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 Seattle-based WaMu, 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.

Dimon’s Stance

JPMorgan still faces probes by the Justice Department that include its energy-trading business, recruiting practices in Asia and its relationship with convicted Ponzi scheme operator Bernard Madoff. Legal bills drove the bank to its first quarterly loss under Dimon, and he has told investors the clashes probably will continue. Before that, Dimon had led the company to three years of record earnings, including a $21 billion profit for 2012.

“Our preference is always to resolve it,” Dimon told investors during a conference call last month to discuss the New York-based bank’s $380 million third-quarter loss. “It is very hard to fight with your regulators or the federal government, but we want them to be fair and reasonable.”

Dimon, 57, negotiated outlines of the deal in a call with Holder last month following a Washington meeting on Sept. 26, people familiar with the matter said at the time. The bank is trying to bundle costs for as many legal cases as possible into the second half of this year, one of the people said.

Levin Reacts

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.

Senator Carl Levin, the Michigan Democrat who leads the Senate Permanent Subcommittee on Investigations, called the JPMorgan accord “a step toward accountability for the Wall Street recklessness and excessive greed that devastated our economy.” Levin’s panel wrote a 2011 report on the origins of the 2008 credit crisis.

Schneiderman, New York’s attorney general, said at a news conference the settlement is “a major step in restoring confidence in our financial system,” and the first of more such agreements with other banks.

Further cases will follow the settlement with JPMorgan, said Tony West, a U.S. associate attorney general, said in an interview today with Bloomberg Television. The group of state and federal officials investigating misconduct in the securitization of mortgage loans is looking at “a number of institutions and a number of deals,” West said. The common thread is that banks haven’t disclosed the risky nature of the loans, he said.

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