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JPMorgan $13B Mortgage Settlement May Be Only the Beginning

The bank was hit with a record fine for its actions in the mortgage-backed securities market prior to the financial crisis.

The $13 billion settlement between JPMorgan Chase and the U.S. government to settle charges that the bank overstated the quality of mortgages it was selling to investors just prior to the 2008 financial crisis may not be the last - or biggest -- fine big banks have to pay in this regard.

The record amount paid by the bank is meant to resolve federal and state civil claims arising out of the packaging, marketing, sale and issuance of residential mortgage-backed securities (RMBS) by JPMorgan, Bear Stearns and Washington Mutual prior to January 1, 2009.

The settlement requires JPMorgan to pay $9 billion and provide $4 billion in consumer relief, including mortgage modifications for homeowners at risk of foreclosure. The settlement was negotiated through the Residential Mortgage-Backed Securities Working Group, a joint state and federal working group formed in 2012 to share resources and continue investigating wrongdoing in the mortgage-backed securities market prior to the financial crisis.

The federal government says the bank knowingly sold bad mortgages to investors and misled them. "JPMorgan employees knew that the loans in question did not comply with its own guidelines and were not otherwise appropriate for securitization, but they allowed the loans to be securitized – and those securities to be sold – without disclosing this information to investors," reads a portion of a statement from New York Attorney General Eric Schneiderman, who co-chaired the working group.

However, the $13 billion figure paid by JPMorgan may only be the beginning, as the fallout from the housing bubble continues some five years later.

According to Reuters, government negotiators are aware that the pattern of bad mortgages being packaged and sold to investors was spread throughout the banking industry.

"Right now, the banks all are holding their breath," James D. Cox, a law professor at Duke University who specializes in corporate and securities law, told the news agency. "They understand it means a big number for them as well."

In a conference call with investors Tuesday, JPMorgan's CFO, Marianne Lake, also acknowledged this settlement may not be the end of the bank's legal wrangling related to the housing crisis. JPMorgan has set aside some $23 billion to cover costs related to the crisis, though Lake said it was "too early" to discuss whether the bank would have to add to its legal reserves, according to published reports.

Further, the actual amount of the settlement may be lower as a large amount of the $13 billion is tax deductible, according to media reports.

"We are pleased to have concluded this extensive agreement with the government", JPMorgan Chairman and CEO Jamie Dimon said in a statement. "Today's settlement covers a very significant portion of legacy mortgage-backed securities-related issues for JPMorgan Chase, as well as Bear Stearns and Washington Mutual."

Also, the settlement also does not absolve JPMorgan employees from possible criminal charges, according to the Department of Justice.

[See Also: U.S. Banks Provided $45 Billion in Homeowner Relief Under Mortgage Deal]

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio

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KBurger
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KBurger,
User Rank: Author
11/20/2013 | 7:35:50 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
I heard one analysis of the settlement last night, where part of the discussion focused on the financial impact on JPMC -- the talking head said, "This will have a big impact on bonuses." It always kind of amazes me that even "experts" seem to think the only people who work for big banks are traders, senior executives and others who make 6-figure-and-more salaries. Obviously there are many people who toil in IT, customer service, operations, etc., who are not getting bonuses regardless of how well a bank does -- and who probably pay even more of a price if the bank is forced to make cutbacks, etc. I'm not saying that any bank should not (literally) pay a price for bad practices, just that the employees who have the most at stake are rarely the ones who perpetuated the misdeeds.
Yaldez4FSI
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Yaldez4FSI,
User Rank: Apprentice
11/20/2013 | 8:35:21 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
Yes, Kathy so true.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
11/20/2013 | 9:13:57 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
Absolutely true. The punishment should be more precise, but I don't think that the Justice Department was ever considering going after individuals at the bank. They were just looking for a big settlement that grabs headlines.
IvySchmerken
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IvySchmerken,
User Rank: Author
11/20/2013 | 11:49:50 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
I agree this is a symbolic effort by the Justice Department to penalize the bank and score points with the public, but not really go after executives that ran the departments in question. After all, these executives are following a strategy approved by those above them. And what about the board?
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
11/21/2013 | 11:44:37 AM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
The $13b settlement was probably a good deal for JPM, believe it or not. Now, this entire issue is put behind the company. If JPM decided to fight this in court, it would have dragged on for months, with press headlines each day. The $13b settlement generated headlines for 1 or 2 days, and now it's over.
Byurcan
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Byurcan,
User Rank: Author
11/21/2013 | 1:22:20 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
And I've read reports that say $11 billion of this penalty is tax-deductible, for what it's worth.
Becca L
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Becca L,
User Rank: Author
11/21/2013 | 4:58:48 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
I heard the same, which is rather disturbing. I feel like there should be some tax code around this to make sure the fine "sticks."
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
11/25/2013 | 9:26:13 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
As ridiculous as it sounds, a $13 billion loss for an organization like JPM is not really that big of a deal to begin with, never mind the tax considerations. From the reports I read $13 billion was a figure that JPM offered to pay; the regulators didn't have to work that hard to wrangle it out of them.
Byurcan
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Byurcan,
User Rank: Author
11/20/2013 | 10:05:08 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
Very true, alot of those people carrying boxes of their stuff out of Bear Stearns a few years ago that was all over news reports were regular, middle class workers.
Becca L
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Becca L,
User Rank: Author
11/21/2013 | 5:02:15 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
I remember the footage on TV, that was a depressing sight. To Kathy and your point, it's disturbing to hear these "pity us, no bonus this year" comments when others are left scrambling for new employment.
IvySchmerken
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IvySchmerken,
User Rank: Author
11/22/2013 | 4:44:00 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
I agree on a certain level, it's hard to feel sorry for professionals who are not getting bonuses when many are still unemployed and attending job fairs with long lines to get in the door. Firms cut people to lower their expenses and boost their stock prices, so it may have nothing to do with mortgage penalties. The real issue is retraining people to get the highly skilled jobs that are in demand.
IvySchmerken
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IvySchmerken,
User Rank: Author
11/20/2013 | 11:47:32 PM
re: JPMorgan $13B Mortgage Settlement May Be Only the Beginning
Some of this penalty is going to compensate investors (i.e., state pension funds) that lost money investing in mortgage-backed securities that contained bad mortgages. Pension funds are investing the hard-earned money of employees, often teachers, fireman and unions, in fixed income and other types of securities. So, on top of home foreclosures, pension funds lost assets from subprime debt that were packaged up and sold to them.
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