WASHINGTON — After months of tense negotiations, the Justice Department on Tuesday finalized a record $13 billion settlement with JPMorgan Chase to resolve allegations that the bank knowingly sold faulty mortgage securities that contributed to the financial crisis.
This marks the largest penalty ever levied against a single company and represents a colossal win for the government after years of public criticism over its struggle to hold Wall Street accountable for crisis-era sins. It is also a tremendous black eye for a bank once lauded as the nation’s strongest financial institution to emerge from the crisis.
New York Attorney General Eric Schneiderman, who is a member of President Obama’s mortgage task force that helped negotiate the deal, announced the details of the settlement Tuesday.
The agreement puts to rest multiple state and federal probes into JPMorgan’s sale of mortgage securities to investors. But it still leaves the bank and its executives at risk of criminal prosecution for fraud.
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Like other banks, JPMorgan bundled hundreds of home loans into securities and marketed them as investments that could be traded like stocks. When homeowners defaulted on their mortgages in droves, the value of the securities plummeted and investors were saddled with huge losses. Government authorities subsequently launched probes into whether the banks misled investors about the risks and the quality of the securities.
The most complex component of the JPMorgan settlement involves $4 billion in aid directed to distressed homeowners. Nearly half of the aid will go to reducing the principal amount JPMorgan customers owe on their mortgages.
The remaining money will be used to lower interest rates on existing loans as well as provide low-income borrowers new mortgages, which the bank is forbidden from selling to investors and forced to keep on its books to encourage responsible lending.
An independent monitor will supervise the consumer-relief portion to ensure it is completed by the end of 2016.
Justice has earmarked $7 billion of the total settlement for investors who lost billions on the faulty securities. That amount includes a $4 billion deal announced last month by the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac.
At least $1 billion will go to resolve a lawsuit filed by Schneiderman in October 2012.
As a part of the agreement, the bank has to acknowledge that it, along with its affiliates Bear Stearns and Washington Mutual, made false representations to investors. JPMorgan also admits that its employees knew the loans in question did not comply with its own guidelines, but the bank allowed the loans to be bundled and sold anyway.
The bank also agreed not to ask the Federal Deposit Insurance Corp. to absorb the cost of soured securities tied to Washington Mutual, the failed bank that JPMorgan bought out of receivership for $1.9 billion in 2008. JPMorgan had argued that the FDIC is responsible for Washington Mutual’s bad mortgage securities — some of which are a part of the Justice complaint. The standoff over the failed bank was a major sticking point during negotiations.
The final piece of the landmark deal calls for JPMorgan to pay $2 billion in fines to the Justice Department.
The bank cannot claim a tax deduction on the penalty, but it will be able to write off a portion of the consumer relief and investor compensation as an ordinary business expense. The tax implications of the deal have raised concerns among lawmakers and advocacy groups in recent weeks.
Pulling off this historic settlement is a significant accomplishment for Attorney General Eric Holder. He took a direct hand in the negotiations and, in an unusual move, held a 50-minute meeting with JPMorgan Chief Executive Jamie Dimon in late September.
Justice has levied multimillion-dollar fines against big banks, including HSBC and Barclays, but to lawmakers and consumer advocates, those penalties are tantamount to a slap on the wrist. Advocacy groups took Holder to task earlier this year for saying that some banks had become too big to prosecute.
But the JPMorgan settlement could quiet criticism against the department, especially as prosecutors plan to use the agreement as a template for reaching similar deals with other banks.
Federal and state prosecutors, as part of the Obama administration’s mortgage task force, are looking into the sale, packaging and underwriting of home loans at nine other banks, including Bank of America, Wells Fargo and Citigroup.
JPMorgan is still embroiled in federal probes into tactics used to collect credit-card debts and its role in the manipulation of a key interest-rate benchmark that affects trillions of dollars of bonds.
The barrage of government probes and multibillion-dollar settlements led JPMorgan on Oct. 11 to report its first loss in nearly 10 years. The bank suffered a net loss of $380 million after setting aside an additional $9.2 billion for future litigation expenses. All told, the bank has a $23 billion chest to cover its mounting legal costs.