The civil settlement – the largest ever reached between a government and a company – marks the end of weeks of tense negotiations between representatives of JP Morgan, the largest US bank, and government agencies under pressure to hold banks accountable for wrongdoing that led to America’s housing crisis.
“The conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” said US attorney general Eric Holder last night.
The payment eclipses the record $4bn settlement reached between oil driller BP and the US government following the Gulf of Mexico spill in 2010.
US deputy attorney-general James Cole told the American Bankers Association that too many supervisors incentivised excessive risk-taking, knowing that risky products “could be unloaded down the road… leaving someone else to deal with the consequences”.
Even after the settlement, JP Morgan faces at least nine other government investigations, covering everything from its hiring practices in China to whether it manipulated the Libor benchmark interest rate.
The bank and government agencies – led by the justice department – had reached a tentative agreement in the middle of October and have been hammering out details since then.
Earlier this week, the bank and officials at the US justice department and the US department of housing and urban development agreed to the terms of a $4bn relief package that is part of the broader deal, paving the way for the full announcement. Of the $4bn, about $1.5bn is for the bank to write down the value of loans on its books, effectively forgiving some borrowers’ debts. As much as $500 million more will go to change the terms of loans to lower monthly payments.
The remaining $2bn will go for assorted measures, including new loans for low- and moderate-income borrowers in areas that have been hard-hit by the housing crisis and for demolishing abandoned homes, a source said.
Last month the Federal Housing Finance Agency announced a related $5.1bn deal to resolve claims about the quality of mortgage bonds it sold, $4bn of which is part of the expected announcement.
JP Morgan’s negotiations with the justice department began in earnest in the spring, after government lawyers in California reached a preliminary conclusion that the bank had violated US civil laws.
The justice department looked into the mortgage bonds that the bank had sold from 2005 to 2007, the company disclosed in August.
JP Morgan has said that most of its mortgage-backed securities came from Bear Stearns and Washington Mutual, troubled companies it bought in 2008.
Legal costs from government proceedings pushed JP Morgan to a rare loss in this year’s third quater, the first loss under chief executive Jamie Dimon’s leadership.
The bank reported last month that it set aside $9.2bn in the July-to-September quarter to cover the string of legal cases against the bank.
JP Morgan has already said it has placed $23bn in reserve to cover potential legal costs.