JPMorgan and Regulators Stumble Over a Billion-Dollar Disagreement


It appears that settlement talks between JPMorgan Chase & Co. (NYSE:JPM) and the U.S. Department of Justice have broken down. The DoJ is looking to extract as much as $13 billion from the bank over various allegations of wrongdoing in the lead-up to and during the financial crisis. Sources familiar with the matter told The Wall Street Journal that disagreements related to the criminal probe and whether some of the penalty should actually be extracted from the Federal Deposit Insurance Corporation have stalled what previously appeared to be relatively smooth negotiations.

It may have been naïve to believe that the multibillion-dollar settlement — the largest fine ever sought from a single bank — could have gone through without a hitch. JPMorgan CEO Jamie Dimon has made it clear that he is interested in cooperating with regulators and resolving the enormous pile of litigation facing his bank, but he has not exactly been negotiating with his hat in his hands. JPMorgan may be responsible for a certain amount of bad behavior — the London Whale fiasco being the most visible example — but it is claiming a certain amount of somewhat justified protection against some of the charges filed against it by the DoJ.

Namely, JPMorgan is claiming that it should not be fully liable for the actions of Washington Mutual (JPMorgan acquired the banking assets of the thrift operation in 2008, during the heat of the financial crisis). Instead, the bank argues, the FDIC bears ultimate responsibility for those liabilities.

The government, of course, has little interest in seeing part of its record settlement (a rare “win” for regulators) effectively be charged to another government organization. That would once again place part of the fallout on the shoulders of the taxpayers. It’s unclear exactly how the impasse will be resolved, but it seems unlikely at this point that regulators will cede ground on this front. With the specter of a criminal probe looming overhead, JPMorgan may be forced to concede and bear the weight of all the losses.

Also at issue is JPMorgan’s $5.1 billion settlement with the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac. This settlement is designed to cover violations related to the bank’s sale of bad mortgages. An FHFA statement regarding the settlement noted that the deal covered two parts: $4 billion would cover violations on mortgage-backed securities (alleged but not admitted), while an additional $1.1 billion would cover the “representation and warranty claims” with Fannie ($670 million) and Freddie ($480 million).

On the table is the $1.1 billion charge for warranty claims, which regulators argue the bank can’t count toward the total $13 billion settlement sought by the Department of Justice. Depending on which way this swings, the total amount of the settlement left unresolved could either be $8 billion or $9 billion — not quite a rounding error. Regardless, the $4 billion charge over mortgage-backed violations would be counted toward the total settlement.

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