JPMorgan Chase and the Justice Department finalized a $13 billion settlement on Tuesday, punctuating a long legal battle over the risky mortgage practices that became synonymous with the financial crisis.
The civil settlement, which materialized after months of wrangling, resolves an array of state and federal investigations into JPMorgan’s sale of troubled mortgage securities to pension funds and other investors from 2005 through 2008. The government accused the bank of not fully disclosing the risks of buying such securities, which imploded in 2008 and helped plunge the economy to its lowest depths since the Depression.
JPMorgan’s settlement strikes at the core of the accusations, requiring the bank to pay fines to prosecutors and provide relief to struggling homeowners as well as compensation for harmed investors. JPMorgan initially planned to pay about $3 billion, a position it abandoned midway through negotiations.
The final $13 billion deal eclipses other major Wall Street settlements. In fact, it is the largest sum that a single company has ever paid to the government.
The magnitude of the payout reflects a broader strategy shift within the Justice Department to hit Wall Street where it hurts most: the bottom line. Once content to extract multi-million dollar fines that critics dismissed as little more than a slap on the wrist, prosecutors have signaled to the nation’s biggest banks that the billion- dollar mark is a floor rather than a ceiling.
In the JPMorgan case, the Justice Department secured a range of other concessions. For one, JPMorgan had to acknowledge a statement of facts that outline the bank’s wrongdoing in the case. JPMorgan also backed down from demands that prosecutors drop a related criminal investigation into the bank and largely forfeited the right to try to later recoup some of the $13 billion from the Federal Deposit Insurance Corporation.
“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,†Attorney General Eric Holder, said in a statement. “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. Attorney General Eric H. Holder Jr. said in a statement
Underscoring the importance of the case, top Justice Department officials led the settlement talks. Mr. Holder negotiated directly with Jamie Dimon, JPMorgan’s chief executive, talking five times over the phone and meeting in person at the Justice Department in Washington.
Tony West, the No. 3 Justice Department official, played an even larger role, negotiating much of the deal with bank executives, a task that typically falls to lower-level government lawyers.
The involvement of senior officials - and JPMorgan’s status as the nation’s biggest bank - made the case a symbol of the government’s wider crackdown on Wall Street’s dubious mortgage practices. The settlement, officials say, could set a precedent for such cases against Bank of America and other major banks.
And coming fast on the heels of an announcement by federal prosecutors in Manhattan that the hedge fund SAC Capital Advisors had agreed to plead guilty and pay a record $1.2 billion insider-trading fine, the JPMorgan case suggests that Wall Street investigations are gaining momentum at the Justice Department. For years, prosecutors have come under fire for not criminally charging any top Wall Street executives involved in the crisis.
“The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over,†Mr. Holder said. “No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.â€
For JPMorgan and Mr. Dimon, once a favorite in Washington, the deal reflects just how far the pendulum has swung. While the settlement will remove one of JPMorgan’s biggest legal headaches, the bank continues to face a criminal investigation into its role as Bernard L. Madoff’s bank and its decision to hire the sons and daughters of some of China’s ruling elite.
The $13 billion deal also comes just days after the bank struck a separate $4.5 billion deal with a group of investors over the sale of soured mortgage-backed securities. The bank recently reported its first quarterly loss under Mr. Dimon, citing the mounting legal woes.
JPMorgan did not immediately respond to a request for comment.
The $13 billion payout underpins the importance of the mortgage case. The breakdown of the money includes a $2 billion fine to prosecutors in Sacramento and $4 billion in relief to struggling homeowners in hard hit areas like Detroit and certain neighborhoods in New York.
Half of that relief will go to reducing the balance of mortgages in foreclosure-racked areas and offering a so-called forbearance plan to certain homeowners, briefly halting collection of their mortgage payments. For the remaining $2 billion in relief, JPMorgan must reduce interest rates on existing loans and offer new loans to low-income home buyers. The bank also will receive a credit for demolishing abandoned homes in an effort to reduce urban blight.
The government earmarked the other $7 billion as compensation for investors. The largest beneficiary is the Federal Housing Finance Agency, which announced a $4 billion deal with JPMorgan last month. The agency oversees Fannie Mae and Freddie Mac, the housing finance giants that purchased billions of dollars in mortgage securities that later imploded.
JPMorgan will dole out the remaining compensation to a credit union association and state attorneys general in California and New York as well as the Justice Department’s own civil division.
“Today’s settlement is a major victory in the fight to hold those who caused the financial crisis accountable,†Eric T. Schneiderman, the New York Attorney General, said in a statement.
Mr. Schneiderman has helped lead a federal and state task force focused on holding banks accountable for their financial crisis-era mortgage practices. His lawsuit against JPMorgan last year was the opening salvo in the government’s fight with the bank. Under the final settlement, he collected more than $600 million in cash and $400 million in consumer relief.
Some defense lawyers question whether the punishment corresponds to the crime, noting that the $13 billion penalty would very likely wipe out about half of the bank’s annual profit. The lawyers also note that some of the mortgage securities in question are not JPMorgan’s. Instead, they belong to Bear Stearns and Washington Mutual, which JPMorgan bought at the height of the financial crisis in 2008. Mr. Dimon has called lawsuits related to Bear Stearns and Washington Mutual unfair, arguing that JPMorgan purchased the flailing lenders at the urging of the federal government.
Still, the Justice Department structured the deal in a way that focused on JPMorgan’s own securities. The prosecutors in Sacramento who collected the only fine in the case were focused on mortgage securities that JPMorgan itself sold in the lead up to the financial crisis.
And Mr. Dimon’s statements at the time suggested that the bank knew the risks of the deal. “Our eyes are not closed on this one,†he said around the time of the Washington Mutual takeover.
The $13 billion settlement took shape last month in a series of calls between Mr. Holder and Mr. Dimon. Ultimately, in the interest of expediting a deal, Mr. Dimon backed down on several important issues.
While the deal put numerous civil cases to rest, for example, it would not save JPMorgan from any criminal inquiries into its mortgage practices. Under the terms of the deal, the bank would also have to assist prosecutors with an investigation into former employees who helped create the mortgage investments.
That agreement represented a major concession for JPMorgan, which was seeking to put all of its mortgage-related cases behind it. Mr. Dimon abandoned that demand on one of his many phone calls with Mr. Holder.
The Justice Department also extracted a larger than expected fine from JPMorgan. The bank’s opening offer was about $3 billion, a fraction of what it paid.
At one point, Mr. Dimon asked, “What will it take to get this done?†Mr. Holder informed Mr. Dimon, who at the time was offering $11 billion, that the government would not accept less than $13 billion. And with that, they had a tentative deal.
At other moments, the bank mounted stronger objections. In a draft settlement document JPMorgan circulated to the Justice Department late last month, people briefed on the talks said, the bank sought to credit an unrelated $1.1 billion penalty toward the $13 billion settlement, a move that rankled the Justice Department.
But with the Justice Department refusing to apply the credit, the bank had to either back down or face a lawsuit. JPMorgan chose to withdraw its request.
Another flash point in the negotiations centered on mortgage securities sold by Washington Mutual. JPMorgan contends that when the bank purchased Washington Mutual in 2008, the Federal Deposit Insurance Corporation agreed to shoulder some of the liabilities stemming from the failed thrift. The Justice Department, the people said, has been adamant that JPMorgan not transfer some of the settlement costs onto the F.D.I.C. Ultimately, JPMorgan blinked.
Such sticking points threatened to scuttle the deal at several turns. As talks dragged on, the Federal Housing Finance Agency ran ahead, announcing its own deal with the bank last month. That deal effectively allows JPMorgan to try and recoup about $1 billion from the F.D.I.C.
For JPMorgan, another thorny issue involved the statements of fact included in the pact. The statements, in essence, amount to admissions of wrongdoing.
For JPMorgan, any admissions had to strike a delicate balance, according to two people familiar with the bank’s thinking: satisfying the government, but not stoking private lawsuits from investors.
Despite paying a string of banner settlements this year - a $1 billion payout in September to resolve an array of government investigations into a trading loss in London, $80 million over dubious credit card products and now the $13 billion deal - Mr. Dimon appears to have a firm grip atop JPMorgan, according to several bank executives.
The bank’s board remains steadfastly behind Mr. Dimon, who holds the dual roles of chairman and chief executive. Part of that support, the executives said, traces to a widespread belief among board members that the deals represent a victory for the bank as it tries to move past its legal and regulatory woes.
The mortgage deal almost did not happen.
As the summer drew to a close, the prosecutors in Sacramento prepared to announce their civil case against JPMorgan. The prosecutors informed the bank that the lawsuit was coming on Sept. 24.
The Justice Department quietly planned a news conference to announce the case. And Benjamin B. Wagner, the United States attorney in Sacramento, boarded a plane to Washington so he could attend the news conference.
But at 8 a.m. on Sept. 24, just four hours before the scheduled news conference, Mr. West’s cellphone rang. It was Mr. Dimon.
“I think we should meet in person,†Mr. Dimon said, according to a person briefed on the call.
The meeting happened later that week, laying the groundwork for the $13 billion deal.
