The US government and JPMorgan Chase have agreed a record $13bn settlement over the company’s sales of low quality mortgage-backed securities that collapsed in value during the financial crisis, a source close to the talks has said.
The source said the documents spelling out the agreement, which has yet to be finalised, could be signed as early as today.
The deal is the largest reached between the government and a corporation, eclipsing the record four billion dollars levied on oil giant BP in January for the worst offshore oil spill in US history.
America’s biggest bank will pay more than six billion dollars to compensate investors, four billion to help struggling homeowners and the remainder as a fine.
The final issue revolved around the four billion dollars to compensate consumers. According to the source, some $1.5bn will be a write-down to reduce the principal of homeowner loans, $300m will enable homeowners to pay less now on their mortgages and the remainder of the four billion will go towards reducing mortgage interest rates, originating new loans and helping revive blighted properties in some of the hardest hit areas of the housing crisis such as Detroit.
An independent monitor will be appointed to oversee the assistance to homeowners.
The deal is the latest chapter in the burst of the housing bubble in 2007 when bundles of mortgages sold by JPMorgan and other financial institutions left investors with billions of dollars in losses.
JPMorgan has said that most of its mortgage-backed securities came from Bear Stearns and Washington Mutual, troubled companies that JPMorgan acquired in 2008.
Still to come is a decision on whether the US Justice Department will file criminal charges against JPMorgan. An investigation by the US attorney’s office in Sacramento, California, is under way.
As part of the six billion dollars to investors, four billion 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 on October 25.
Fannie and Freddie were bailed out by the government during the crisis and are under federal control.
The Justice Department and the banks reached a tentative settlement in mid-October on the $13bn, but the negotiations hit a stumbling block that has now been resolved. As part of any settlement, JPMorgan wanted to be able to collect money from a receivership involving Washington Mutual, the biggest US savings and loan. The S&L failed and was bought by JPMorgan.
The Federal Deposit Insurance Corporation, which maintains stability and public confidence in the banking system, said JPMorgan should be responsible for any liabilities regarding the Washington Mutual acquisition. Under the arrangement, JPMorgan cannot seek reimbursement from FDIC for any part of the deal, said the person close to the talks.
The $13bn JPMorgan settlement amount is only about half of its record 2012 net income of $21.3bn, or $5.20 a share, which made it one of the most profitable US banks last year.
Mounting legal costs from government proceedings pushed JPMorgan to a rare loss in this year’s third quarter, the first under chief executive Jamie Dimon’s leadership. The bank reported on October 11 that it set aside $9.2bn in the July-September quarter to cover the string of legal cases against the bank. JPMorgan said it has placed $23bn in reserve to cover potential legal costs.
On Friday, the company announced it had reached a $4.5bn 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.