JPMorgan Chase

JPMorgan in US$4.5b settlement with buyers of mortgage-backed securities

PUBLISHED : Saturday, 16 November, 2013, 2:05pm
UPDATED : Sunday, 17 November, 2013, 6:42am

JPMorgan Chase has reached a US$4.5 billion settlement with US investors who said the bank deceived them about bad mortgage investments.

The settlement, announced on Friday, covers 21 major institutional investors, including competitor Goldman Sachs, BlackRock Financial Management, and Metropolitan Life Insurance.

The mortgage-backed securities were sold by JPMorgan - the biggest US bank - and Bear Stearns between 2005 and 2008.

The deal is the latest in a series of legal settlements over JPMorgan's sales of mortgage-backed securities in the years preceding the financial crisis.

As the US housing market collapsed between 2006 and 2008, millions of homeowners defaulted on high-risk mortgages. That led to billions of dollars in losses for investors who bought securities created from bundles of mortgages. Those securities were sold by JPMorgan and other big Wall Street banks.

New York-based JPMorgan has said that most of its mortgage-backed securities came from investment bank Bear Stearns and savings and loan Washington Mutual, troubled companies that JPMorgan acquired in 2008.

Separately, JPMorgan has been negotiating with the US Justice Department to settle a civil inquiry into its sales of mortgage-backed securities.

The bank reached a tentative deal last month to pay US$13 billion, but the negotiations have hit a stumbling block. As part of the US$13 billion deal, US$4 billion will resolve US government claims that JPMorgan misled two mortgage finance giants, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, about risky mortgage-backed securities.

That part of the deal was announced on October 25. Those two agencies, better known as Fannie Mae and Freddie Mac, were bailed out by the US government during the crisis and are under federal control.

Still to be decided is whether the Justice Department will file criminal charges against JPMorgan in the debacle.

Mounting legal costs pushed JPMorgan to a rare loss in this year's third quarter, the first under chief executive Jamie Dimon's leadership.

JPMorgan said it has placed a total of US$23 billion in reserve to cover potential costs.

Goldman Sachs, Citigroup and other big banks have been accused by the Securities and Exchange Commission of deceiving investors in sales of mortgage securities in the run-up to the crisis. Together they have paid hundreds of millions of US dollars in penalties to settle civil charges brought by the SEC.

JPMorgan settled SEC charges in June 2011 by agreeing to pay US$153.6 million and reached another such agreement for US$296.9 million last November.

The banks in all the SEC cases were allowed neither to admit nor deny wrongdoing - a practice that has brought criticism of the agency.