After much back and forth, JPMorgan Chase agreed in November to pay $13 billion to settle federal charges that it sold “mortgage-backed securities” without properly informing buyers of their highly risky nature. The bank did not admit wrongdoing in agreeing to settle.
The $13 billion settlement is by far the largest of its kind in national history. It stems from the sale of bundles of mortgage-backed securities that were sold to investors, including Fannie Mae and Freddie Mac, the government-sponsored mortgage entities that were put into conservatorship after the housing market collapse in 2008.
Ironically, most of the government’s allegations appear to center on the activities of two financial companies JP Morgan Chase rescued at the behest of the federal government as they headed for financial ruin. JP Morgan Chase took over their liabilities when it took over those companies.
A settlement was announced in late October but then appeared to be falling apart as negotiations continued. One part of the agreement began proceeding as announced, though.
Money for Fannie, Freddie
In late October JPMorgan Chase announced it had agreed to pay two settlements totaling $5.1 billion to the Federal Housing Finance Agency. The larger of the settlements, valued at $4 billion, is over mortgage-backed securities that were sold to Fannie Mae and Freddie Mac. Those securities went bad, resulting in billions of dollars of losses for Fannie and Freddie. The FHFA, which serves as conservator for Fannie and Freddie, says the quality of the mortgages was misrepresented at the time of sale. The remaining $1.1 billion resolves Fannie’s and Freddie’s repurchase claims associated with whole loan purchases.
“The satisfactory resolution of the private-label securities litigation with J.P. Morgan Chase & Co. provides greater certainty in the marketplace and is in line with our responsibility for preserving and conserving Fannie Mae’s and Freddie Mac’s assets on behalf of taxpayers. This is a significant step as the government and J.P. Morgan Chase move to address outstanding mortgage-related issues,” said FHFA Acting Director Edward J. DeMarco in a statement. “Further, I am pleased that a resolution of single family, whole loan representation and warranty claims could be achieved at the same time. This, too, will have a beneficial impact for taxpayers and the housing finance market.”
“Today’s settlements totaling $5.1 billion are an important step towards a broader resolution of the firm’s [mortgage-backed securities]-related matters with governmental entities, and reflect significant efforts by the Department of Justice and other federal and state governmental agencies,” said JPMorgan Chase in a statement.
Punished for Bear Stearns
That left $8 billion of the settlement up in the air. The reason behind the huge price tag for the overall settlement grabbed the attention of financial analysts, who say it could set a dangerous precedent. Most of the government’s complaints center on mortgage business that JPMorgan Chase took over when it acquired the Bear Stearns Companies, a major investment bank and securities firm that collapsed in 2008 at the start of the financial crisis and recession. The federal government pressured JPMorgan Chase to rescue Bear Stearns. JPMorgan Chase initially agreed to pay $2 a share but under pressure ended up paying $10 a share for Bear Stearns assets and operations.
JPMorgan Chase also rescued mortgage lender Washington Mutual at the request of the government, and some of the Washington Mutual activities were also used to pressure a JPMorgan Chase settlement.
Analysts say the government is setting a bad precedent by punishing JPMorgan Chase for the actions of firms it rescued at the behest of the government.
“The feds strong-armed JPMorgan Chase into absorbing Bear Stearns, and now they are penalizing them for things Bear Stearns had done before the takeover—specifically, peddling low-quality, high-risk mortgage-backed securities. Never mind the fact that the primary impetus to crank out large volumes of such shoddy (and eventually ‘toxic’) securities came from Uncle Sam, particularly the Department of Housing and Urban Development which pressured Fannie Mae and Freddie Mac to increase the number of risky mortgages that were the main ingredient of mortgage-backed securities,” wrote Forbes columnist Mark W. Hendrickson in his November 2 column.
Billions More At Stake
In addition to the financial settlement, Attorney General Holder has made clear the government could pursue criminal charges despite the settlement. JPMorgan Chase has reported setting aside an extra $23 billion for future settlements and legal fees.
On November 3, Bloomberg News reported JPMorgan Chase has disclosed at least eight separate Department of Justice investigations against the company.