JP Morgan will pay $13 billion, the largest settlement any private firm has ever paid to the Justice Department, to settle civil claims about the sale of mortgage backed securities. The firm admitted misrepresenting to investors that mortgage loans complied with underwriting guidelines when, in actuality, these loans were not suitable for securitization. Because the sale of these securities contributed to the 2007 financial crisis, prosecutors sought accountability for the banks that sold such securities. U.S. Attorney General Eric Holder said, “without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown.”
Though this settlement concludes civil federal claims, JP Morgan could face criminal charges as well as civil suits from parties injured by the sale of such securities. However, JPMorgan denied that it violated any specific laws as such an admission could fuel private lawsuits. Individual employees also avoided charges, but the Justice Department continues investigating the role of individual bankers.
The $13 billion fine includes:
- $2 billion to prosecutors in Sacramento
- $4 billion for home owners in struggling areas such as New York and Detroit
- $7 billion to federal agencies and state regulators
Reactions to the deal were mixed. Some believe that the deal may still be a victory for JPMorgan. JPMorgan may have earned as much as $1 trillion from the sale of mortgage backed securities, but it has set aside $25 billion, or only 2.5% of its profits from such securities, to handle related legal claims. Additionally, many are worried that levying civil fines against the institution, but not criminal charges against individuals, sends the message that regulatory fines are simply the cost of doing business and will not deter any future activity. Finally, approximately half of the fine is tax-deductible.
However, the opposing view is that not only is the $13 billion fine the highest fine in the history of the DOJ, but the fine also accounts for nearly half of JP Morgan’s 2012 profits. Moreover, many of the mortgage-backed securities involved in this settlement were bought by Washington Mutual and Bear Stearns prior to 2008, two banks that JP Morgan bought in 2008 with the encouragement and assistance of the federal government to avoid a broader financial disaster. However, JPMorgan purchased both banks at low prices and received federal assistance in covering both banks’ liabilities.
JP Morgan is the first of the Justice Department’s prosecutions, but according to Attorney General Holder, this suit may be a model for future lawsuits against other financial giants.