November 20, 2013

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]

ABOUT THE AUTHOR
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 ...