Updated: 3:35 AM EDT 23 October 2013
Econintersect: Reuters reported Saturday evening (19 October 2013) that a source has informed them the U.S. Justice Department has reached a tentative agreement with JP Morgan Chase (NYSE:JPM) for a fine to settle complaints resulting from a government investigation of bad mortgages the bank sold to investors in 2008 and prior years. Recently the figure of $11 billion had been rumored as a possible settlement, although initially it was mentioned that the government had floated the idea of $20 billion. The latest report from Reuters says the number agreed to is $13 billion.
According to Reuters no one at JP Morgan or the DoJ would agree to make a comment.
One significant aspect of the deal: It is reported that the settlement does not release JP Morgan or any individuals from potential criminal prosecution related to the mortgages, their securitization or sales to investors.
The Reuters source indicates that JP Morgan will agree to cooperate with investigations into the possible criminal activities of individuals in the bank’s activities related to mortgages.
It is reported that the criminal liablity had been a major sticking point in the negotiations.
Reuters mentions a second source:
Another source close to the discussions characterized a deal as likely, but cautioned that parts of the agreement are still being hammered out, and the settlement could conceivably fall apart.
One of the items still in negotiation is a statement of facts, according to Reuters.
The negotiations are complicated because some of the alleged fraud was inherited by JP Morgan when they took over Bear Stearns and Washington Mutual in 2008.
Another complication is that other agencies may (or may not) be involved in the settlement, including the Federal Housing Finance Agency, the National Credit Union Administration, the state of New York and others who have similar lawsuits against JP Morgan. Reuters had reported Friday that a deal with the FHFA for $4 billion was in the works. This may now be part of the $13 billion.
An article in The Washington Post said:
The stakes are high for both sides. Pulling off a record settlement would be a significant accomplishment for Holder. The Justice Department 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.
Thomas Gorman, a securities lawyer at Dorsey & Whitney, was quoted in the WaPo:
“Resolving the mortgage cases for $13 billion is a major win for the DOJ, particularly since the deal only applies to the civil case. It also brings to account a major Wall Street player for the market crisis, something enforcement officials and the public have been looking for.”
Several others have provided comments to Econintersect.
William K. Black, University of Missouri Kansas City:
[T]he Department of Justice (DOJ) and Holder are stalwarts who have demonstrated their toughness and JPMorgan is a model corporate citizen.
After that bit of sarcasm Black added:
WaMu was one of the world’s largest criminal enterprises specializing in making fraudulent liar’s loans and then selling the fraudulent loans to the secondary market through fraudulent “reps and warranties.” These frauds destroyed WaMu.
And he concluded with:
The hidden story remains the dearth of criminal referrals from the regulatory agencies and the resultant lack of expertise in the FBI/AUSAs about the relevant industries.
Note: Black will be posting a full discussion of this affair and GEI will share that with readers, either as a full repost or as an item on the daily list “What We Read Today“.
Yves Smith, Naked Capitalism:
The problem is this is a settlement that appears to have not been adequately investigated, save for the FHFA’s putback charges, the biggest single item ($4 billion out of the $13 billion). Forget the $4 billion in borrower relief; the other mortgage settlements show those to be close to worthless. So absent serious investigations, it’s hard to say definitely the settlement is inadequate. But the odds massively favor that.
Yves has posted a full discussion of the situation at Naked Capitalism.
Steve Keen, economics professor, Australia:
[The reported settlement is] insufficient. It’s only half a year’s profit for the firm. They should lose at least a year’s, or more. And the incomes of people at the top should suffer more than the firm’s–a two year or more loss of personal income should occur.
The Savings and Loans crisis, which was far smaller, resulted in hundreds of criminal prosecutions. The Subprime should have as well–simply for fraud if for nothing else since NINJA loans alone were clearly fraudulent in design. Bill Black should be consulted on this.
Joseph M. Firestone, Ph.D., Managing Director and CEO of Knowledge Management Consortium International:
This settlement is another slap on the wrist. What the Government should have tried to cover is the face value of losses suffered by the victims of the fraud as well as punitive damages. The value of the losses suffered was in the trillions of dollars. Looked at from this point of view the size of this settlement is insulting, and another case illustrating that two systems of law exist in power: one for the wealthy and powerful; another for the rest of us.
Larry Doyle, DM Income Advisors LLC:
Transparency remains the great disinfectant. Fines are little more than blankets that obscure meaningful justice from being dispensed and misdirect that justice from those who engaged in and profited from the activities in question. The costs of not properly dispensing justice are an ongoing degradation in the rule of law and an erosion of trust and confidence in free market capitalism. We need a full accounting of all that transpired if we hope to advance as a nation.
Other comments will be added to this article as they are received.
Update 3:35 AM EDT 23 October 2013:
Late comments were received from two more analysts. They were too long to fit at the end of this article and were each published on GEI Opinion as Op Eds:
- Comment on the Historic JP Morgan Settlement by Elliott Morss
- Thoughts About the JP Morgan Case by Marshall Auerback
And one of the best tweets came from Josh Brown:
- JPMorgan in tentative $13 billion deal with U.S. Justice Department: source (Aruna Viswanatha, Reuters, 19 October 2013)
- JPMorgan in $4 billion deal with U.S. housing agency (Aruna Viswanatha and David Henry, Reuters, 18 October 2013)
- JPMorgan agrees to tentative $13 billion settlement with U.S. over bad mortgages ( Sari Horwitz and Danielle Douglas, The Washington Post, 19 October 2013)
- So How Big a Deal is the Pending “$13 Billion” JP Morgan Settlement?
(Yves Smith, Naked Capitalsim)