The U.S. Justice Department Tuesday announced a record US$13 billion settlement with JPMorgan Chase & Co. for misleading investors about mortgage securities containing toxic mortgages that were sold prior to the global financial crisis.
The settlement, which is the largest with a single entity in American history, will 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, in the years leading up to the financial crisis.
Of the US$13 billion deal, US$9 billion will be paid to settle federal and state civil claims by various entities related to RMBS. The firm will pay out the remaining US$4 billion to aid consumers harmed by the unlawful conduct. This relief will take various forms, including principal forgiveness, loan modification, and targeted originations. An independent monitor will be appointed to determine whether JPMorgan is satisfying its obligations.
The deal also includes a statement of facts, in which JPMorgan acknowledges that it regularly represented to RMBS investors that the mortgage loans in various securities complied with underwriting guidelines. However, it says that, contrary to those representations, on a number of occasions, JPMorgan employees knew that the loans in question did not comply with those guidelines and were not otherwise appropriate for securitization — but that the loans were securitized, and the securities were sold, without disclosing this information to investors.
“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” said U.S. attorney general, Eric Holder. “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 behavior.”
“The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over. No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability,” he added.
U.S. authorities notes that the settlement resolves only civil claims arising out of the RMBS packaged, marketed, sold and issued by JPMorgan, Bear Stearns and Washington Mutual. It does not release individuals from civil charges, nor does it release JPMorgan or any individuals from potential criminal prosecution. Additionally, as part of the settlement, JPMorgan has pledged to fully cooperate in investigations related to the conduct covered by the agreement.
JPMorgan says that it is fully reserved for Tuesday’s settlement. “We are pleased to have concluded this extensive agreement with the President’s RMBS Working Group and to have resolved the civil claims of the Department of Justice and others. 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,” said the firm’s chairman and CEO, Jamie Dimon.
The firm notes that, between this settlement and the proposed settlement with institutional investors that was announced on Nov. 15, the company has resolved a “significant portion” of the RMBS-related civil litigation claims faced by the company, and substantially all of the claims brought by federally insured and federally controlled entities.