JP Morgan settlement explained: what it means for banks

Author: Zoe Thomas | Published: 21 Nov 2013
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  • JP Morgan’s $13 billion deal with the US government marks the largest settlement connected to the 2008 financial crisis;
  • Banks have had to accept liability for bad mortgages sold by competitors they acquired during the financial crisis; 
  •  Industry experts have raised concerns that such settlements may discourage banks from stepping in to help each other if there is another financial crisis.

JP Morgan Chase has reached a $13 billion settlement with the US Department of Justice regarding the sale of mortgages and mortgage-backed securities (MBS) during the 2008 financial crisis. Many are now questioning what the deal means for the wider market.

Other mortgage-related settlements, including the $5.1 billion deal with the Federal Housing Finance Authority (FHFA), have plagued JP Morgan for several months. But JP Morgan is not alone - other banks have either reached settlements or are negotiating with the US government over similar allegations stemming from the sale of so-called bad MBS. .

While the sum is notable, so is the statement of facts JP Morgan had to sign as a condition of the settlement. Indeed, now that JP Morgan’s case has been settled, eyes will likely turn to Bank of America (BofA) which was found liable in October for the defective mortgages sold by Countrywide, which it purchased in 2008.

"The biggest issue is the next crisis." said Larry Kaplan from Paul Hastings in Washington D.C. "Dodd-Frank does not cure all in the banking world, in reality it’s a bunch of solutions to problems that did not cause the recent crises."

"I fear that if we have another crisis no one is going to step up and buy the troubled companies again given what has happened to those companies that stood up to help the economy and who received thanks in the form of lawsuits," he added.

Further reading

Aussie litigation funding to change APAC class actions

UK banking standards report: the market responds

OCC chief: how to fix the US mortgage market

The statement of facts from this latest settlement includes information that JP Morgan packaged the MBS with assurance that it would notify investors if any changes or concern arose about the mortgages. But JP Morgan failed to do so, overlooking signs of trouble and rating some loans higher to accept them into the packages. Although this is not an admission of guilt, it does point towards a change in highlighting the issues that led to or accelerated the problem.

In 2011 the FHFA filed 11 lawsuits against some of the world’s largest banks, alleging they misrepresented the underlying mortgages in the MBS they sold to Fannie Mae and Freddie Mac. Several banks, including Wells Fargo and UBS, have reached settlements that have been less publicised and for smaller amounts: $335 million and $885 million respectively.

"I think you should expect settlement deals to continue because banks are interested in putting this liability over-hang behind them and being able to do business with the investors and insurers in the future," said a private counsel who works closely with large US banks.

Settling quickly and quietly may have helped keep the settlements on the lower end, but government prosecutors have engaged in thorough evaluations of many of the issued loans. Even with all that happened, purchasers still seem willing to buy the product - albeit with more discretion.

"There is certainly a heightened sensitivity to the magnitude of potential repurchase risk and it’s not just credit related issues, it’s also regulatory issues, including but not only Dodd-Frank. When selling a loan buyers need to know if they comply with a law and those laws have become more complicated," said the same private counsel.

The next big case
Though banks tend to favour quick settlements in matters like this, several including BofA have fought the charges drawing out the process, and keep the liabilities on while they do so. JP Morgan’s case has been particularly y drawn out and public. ItsChairman and CEO, Jamie Dimon, has been personally involved in negotiating the settlement.

"Because banks and banking companies have so many different masters the big question becomes, what are the unintended consequences," said Kaplan. "To me one of the largest is the distraction of management, causing people to take their eyes off the ball of getting current challenges right."

Given the challenges banks have faced, some are left wondering if they would step up to buy all or parts of competitors in another financial crisis. Regulations in Dodd-Frank have put restriction on the size banks, but the ability of BofA and JP Morgan to purchase failing competitors did prevent the government from taking the task on.

See also:

Aussie litigation funding to change APAC class actions

UK banking standards report: the market responds

OCC chief: how to fix the US mortgage market




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