BANKING giant JP Morgan has tentatively agreed to pay $13bn (£8bn) to settle allegations surrounding the quality of mortgage-backed securities it sold in the run-up to the 2008 financial crisis.
If the agreement is finalised it would be the US government’s highest-profile enforcement action related to the financial meltdown that plunged the economy into the deepest recession since the Great Depression of the 1930s.
A person familiar with the negotiations between the bank and the federal government revealed the deal, speaking on condition of anonymity because it has not been finalised.
The source said attorney general Eric Holder, associate attorney general Tony West, JP Morgan chief executive Jamie Dimon and the bank’s general counsel, Stephen Cutler, negotiated the tentative settlement on Friday night.
The person said the tentative agreement does not resolve a criminal investigation of the bank’s conduct. It is being handled by federal prosecutors in Sacramento, California.
On Friday, Mr Holder told the bank that a non-prosecution agreement was not acceptable – meaning that the US justice department will continue to conduct the criminal investigation of the financial institution, said the person.
As part of the deal, the justice department expects JP Morgan to co-operate with the continuing criminal probe of the bank’s issuance of mortgage-backed securities between 2005 and 2007, the person said.
Of the $13bn, $9bn (£5.6bn) is fines or penalties and the rest will go to consumer relief for struggling homeowners.
When the housing bubble burst in 2007, bundles of mortgages sold as securities soured and the investors who bought them lost billions.
In the aftermath, public outrage boiled over that no high-level Wall Street executives had been sent to jail. Some politicians and other critics demanded that the big bailed-out banks and senior executives be held accountable.
In response, the US government in January 2012 set up a taskforce of federal and state law enforcement officials to pursue wrongdoing with regard to mortgage securities.
In September, JP Morgan agreed to pay $920 (£569m) and admit that it failed to oversee trading that led to a $6bn (£3.7bn) loss last year in its London operation.
That combined amount, in settlements with three regulators in the US and one in Britain, is one of the largest fines yet levied against a financial institution.
In another case, the company agreed to pay a $100m (£62m) penalty and admitted that its traders acted “recklessly” with the London trades.
In August, the justice department accused Bank of America, the second-largest US bank, of civil fraud in failing to disclose risks and misleading investors in its sale of $850m (£526m) in mortgage bonds in 2008. The Securities & Exchange Commission (SEC) regulator filed a related lawsuit.
The government estimates that investors lost more than $100m on the deal. Bank of America disputes the allegations.
The latest action against the beleaguered JP Morgan brought the weight of the Obama administration against the bank, which has enjoyed a reputation for managing risk better than its Wall Street competitors.
JP Morgan came through the financial crisis in better shape than most of its rivals, and Mr Dimon charmed politicians and commanded the attention of regulators in Washington.
A number of big banks, including JP Morgan, Goldman Sachs and Citigroup, have been accused of abuses in sales of securities linked to mortgages in the years leading up to the crisis.
Together, they have paid hundreds of millions in penalties to settle civil charges brought by the SEC, which accused them of deceiving investors about the quality of the bonds they sold.