How Is JPMorgan Walking Away with a $13B Settlement and a Steal?


Wrongs were finally righted Tuesday when JPMorgan Chase (NYSE:JPM) agreed to pay a settlement of $13 billion – a record figure for a single company that will help the government claim that justice was adequately served. According to the Washington Post, the agreement put an end to a long dispute over the bank’s loans that are said to have helped cause the 2008 financial crisis, but despite the penalty’s record size, experts still think that the deal is more favorable to JPMorgan than one might expect.

The bank’s charges center around the money JPMorgan made from selling loans leading up to the 2008 financial crisis that often required little documentation including subprime and Alt-A mortgages. These loans were either orchestrated by JPMorgan itself or the two firms that the bank bought in 2008, Washington Mutual and Bear Stearns. JPMorgan is responsible for the firms’ actions and mortgage liabilities under an agreement.

As reported by The New York Times, the Justice Department’s main allegation throughout the court proceedings was that the bank should have never packaged the loans into the mortgage bonds that were sold to investors, because the mortgages often didn’t meet the standards that JPMorgan legally agreed to when selling the bonds to investors. And because the bank packaged these home loans into securities and marketed them as investments that could be traded like stocks, when homeowners defaulted on their mortgages, the value of the securities plunged and investors suffered huge losses.

JPMorgan acknowledged Tuesday that it made “serious, material misrepresentations to the public,” but the bank never explicitly said that it misled investors, and that leads many to believe that the company actually managed to avoid expressing admission of any wrongdoing. Bloomberg interviewed Peter Henning, a former federal prosecutor and Securities and Exchange Commission attorney, who said: “They’ve left themselves some wiggle room to say, ‘No we didn’t violate the law.’ There is at least some acknowledgment that there were improprieties, but exactly what they were remains open, and certainly they can deny it in any specific case.”

The bank could still face criminal charges, but the DoJ deal helps it avoid separate lawsuits and investigations into its securities sales. According to the Washington Post, Delaware, New York, Massachusetts, California, and Illinois will collectively receive $1 billion in compensation, most of which will go toward restitution for pension funds that invested in the bad mortgage securities, but it will be up to the states to decide how that money will be allocated. The money will help JPMorgan borrowers, but it won’t make up for those who have already lost their homes, and there’s no guarantee that the distribution process will run smoothly.

Despite the criticism and the charge that the final $13 billion figure is more about putting a big number on headlines rather than attempting to fix things, the Department of Justice was pleased with the decision on Tuesday, touting the deal as “the largest settlement with a single entity in American history.”

Unlike other disputes, the bank’s agreement addresses the larger scope of housing problems plaguing U.S. cities, and JPMorgan will be forced to demolish foreclosed or abandoned homes while also donating bank-owned properties to municipalities, nonprofit groups, or lank banks that accumulate properties. This will help increase property values and discourage crime.

Still, in order to properly assess how JPMorgan really fared in the deal, one would have to calculate the settlement payments as a percentage of the subprime and Alt-A mortgages sold. Many believe the bank sold around $1 trillion of mortgages. Associated Attorney General Tony West maintained in a statement via the Washington Post that, ”Through this $13 billion resolution, we are demanding accountability and requiring remediation from those who helped create a financial storm that devastated millions of Americans. By requiring JPMorgan both to pay the largest penalty in history and provide needed consumer relief to areas hardest hit by the financial crisis, we rectify some of that harm.”

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