The $13-billion U.S. settlement that JPMorgan Chase agreed to Tuesday is the largest ever between the U.S. Justice Department and a corporation. Yet it isn't likely the end of the bank's legal troubles over the risky mortgage securities it sold before the financial crisis.
JPMorgan has several lawsuits pending against it and the mortgage businesses it bought from Bear Stearns and Washington Mutual in 2008. There's also an ongoing criminal investigation led by the office of U.S. Attorney Benjamin Wagner in Sacramento, Calif.
The bank may be negotiating or litigating for years and has set aside $23 billion U.S. to cover those costs. Last month, in a filing with the Securities and Exchange Commission, it said it may need up to $5.7 billion U.S. more.
In a conference call with investors Tuesday, JPMorgan's chief financial officer, Marianne Lake, said it was "too early" to discuss whether the bank would have to add to its legal reserves.
The deal also included settlements with New York, California and other states. It was reached after months of negotiations and could serve as a template for similar settlements with other big banks.
As part of the deal, JPMorgan agreed to provide $4 billion U.S. in relief to homeowners affected by the bad loans. The bank also acknowledged that it misrepresented the quality of its securities to investors.
JPMorgan was among the major banks that sold securities that plunged in value when the housing market collapsed in 2006 and 2007. Those losses triggered a financial crisis that pushed the economy into the worst recession since the 1930s.
"The conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown," Attorney General Eric Holder said.
"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 behaviour."
JPMorgan will pay $2 billion U.S. in civil penalties to the federal government and about $1 billion to New York state. An additional $6 billion will go toward compensating investors.
In a statement, JPMorgan CEO Jamie Dimon said the settlement covers a "very significant portion" of the banks troubled mortgage-backed securities, as well as those it inherited when it purchased Bear Stearns and Washington Mutual in 2008.
The deal eclipses the record $4 billion U.S. levied on oil giant BP in January over the 2010 offshore oil spill, which was the worst in U.S. history.
While the $13 billion U.S. that JPMorgan is paying is a staggering sum, it represents only about 60% of the bank's $21.3-billion U.S. net income reported for 2012.
According to the Justice Department's statement of facts agreed to by JPMorgan, many of the mortgage loans were referred to inside JPMorgan as "rejects." Those loans were missing appraisals or proof of borrower's income, employment or assets.
In one review, consultants hired by the bank found that more than a quarter of loans in a pool of tens of thousands were "rejects." Yet JPMorgan ultimately accepted half of those rejects and re-graded them as acceptable.
Wagner, the U.S. attorney in Sacramento, said at a news conference that the activity described in the settlement was "symptomatic of the recklessness on Wall Street."
As part of the $6 billion U.S. to investors, $4 billion U.S. will resolve government claims that JPMorgan misled mortgage finance giants Fannie Mae and Freddie Mac about risky mortgage securities the bank sold them before the housing market crashed. That part of the deal was announced Oct. 25.
Fannie and Freddie were bailed out by the government during the crisis and are under federal control.
Mounting legal costs from government proceedings pushed JPMorgan to a rare loss in this year's third quarter, the first under Dimon's leadership.
On Friday, the company announced it had reached a $4.5-billion U.S. settlement with 21 major institutional investors over mortgage-backed securities issued by JPMorgan and Bear Stearns between 2005 and 2008. The investors, which include Goldman Sachs, said the bank deceived them about the quality of high-risk mortgage securities.
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