The banking firm JPMorgan Chase & Co. has made a tentative offer to the U.S. Justice Department in the form of a record-breaking sum to settle its outstanding lawsuits.
In early August of 2013, JPMorgan Chase and Co., the largest bank in the United States, announced that it was under investigation by the civil and criminal branches of the U.S. Department of Justice for violations of federal securities laws related to sales of subprime and Alt-A backed mortgages it engaged in between 2005 and 2007. The bank’s activities, along with those of the nation’s other major lending institutions during this period, are believed to have culminated in the collapse of the subprime mortgage market, which in turn led to the financial crisis of 2007 and 2008 and contributed to the recession that followed.
The principal response of the Obama administration to this crisis has been to establish the Financial Fraud Enforcement Task Force, which according to U.S. Attorney General Eric Holder, "will continue to take an aggressive approach to combating financial fraud and uncovering abuses in the residential mortgage-backed securities market," by investigating firms such as JPMorgan and the other financial and investment companies believed to have contributed to the collapse. (Reuters, "JPMorgan Faces Criminal and Civil Probes Over Mortgages.")
The latest breakthrough in the task force’s investigation of JPMorgan was first reported by the Wall Street Journal in late October and picked up by news agencies across the country. According to the Journal, the firm's lawyers on Friday, October 18 offered to settle with the Justice Department by handing over a record-breaking sum of $13 billion as reparation for its involvement in the mortgage lending fiasco. The specifics of the deal include:
$4 billion to settle claims by the Federal Housing Finance Agency (FHFA) that J.P. Morgan misled Fannie Mae and Freddie Mac about the quality of loans it sold them in the run-up to the 2008 financial crisis, another $4 billion in consumer relief, and $5 billion in penalties paid by the bank, according to people familiar with the decision. (The Wall Street Journal, "J.P. Morgan Reaches $13 Billion Tentative Deal with Justice Department.")
The Wall Street Journal article cautions that the deal has yet to be finalized, and that it does not release JPMorgan from an ongoing criminal probe of its lending activities during the 2005 to 2007 period. This criminal case hinges on an internal e-mail discovered by the Justice Department, in which a then-employee purportedly “warned her higher-ups that the bank was vastly overstating the value of the mortgages being securitized.” This individual, who has since left the company, has been cooperating with federal prosecutors, according to the Journal, and is expected to be called as a witness if the issue goes to trial.
In addition to the massive sum that JPMorgan has reputedly offered, this case could set another precedent in that the financial firm has, according to a New York Times article, acknowledged that it may have knowingly broken the law. The Times writes that JPMorgan
admitted wrongdoing to the Securities and Exchange Commission, which cited the bank for a breakdown in controls, and the Commodity Futures Trading Commission, which accused the bank of “employing a manipulative device” with its high volume of trading. (The New York Times, “Tentative Deal Hands JPMorgan Chase a Record Penalty.")
The Times article concludes that this settlement offer could be a turning point for the beleaguered bank, noting that
a settlement will go a ways toward wrapping up a number of JPMorgan’s mortgage-related issues, [as] the bank is still weathering a broad wave of scrutiny. With the bank’s legal woes escalating — at least seven federal agencies, several state regulators and two foreign countries are investigating the bank — JPMorgan announced this month that it would have to allot $9.2 billion to cover legal expenses alone.
And while the deal is still a tentative one, a landmark settlement in the JPMorgan case may suggest the need for more than a hint of public contrition on Wall Street, in the form of further admissions of culpability by the banks for their involvement in the crisis. The FHFA and U.S. consumers would assuredly welcome such gestures, alongside similarly hefty repayments.