JP Morgan has agreed on a $13 billion settlement with the US Justice Department over the mis-selling of mortgage securities in the period leading up to the credit crunch. This is the biggest settlement of its type in US financial history.

JP Morgan has agreed on a $13 billion settlement with the US Justice
Department over the mis-selling of mortgage securities in the period leading up
to the credit crunch. This is the biggest settlement of its type in US financial
history.

“The Justice Department, along with federal and state
partners, today [yesterday] announced a $13 billion settlement with JP
Morgan - the largest settlement with a single entity in American history
- to resolve federal and state civil claims arising out of the packaging,
marketing, sale and issuance of residential mortgage-backed securities (RMBS)
by JP Morgan, Bear Stearns and Washington Mutual prior to Jan. 1, 2009,” the DOJ
said in a statement.

“As part of the settlement, JP Morgan acknowledged it made
serious misrepresentations to the public - including the investing public -
about numerous RMBS transactions. The
resolution also requires JP Morgan to provide much needed relief to underwater
homeowners and potential homebuyers, including those in distressed areas of the
country.  The settlement does not absolve
JP Morgan or its employees from facing any possible criminal charges.

Of the $13 billion in total, $9 billion will be paid to
settle federal and state claims, while $4 billion will be paid to mortgage
consumers harmed by JP Morgan, the DOJ statement said.

“Abuses in the mortgage-backed securities industry helped
turn a crisis in the housing market into an international financial crisis,” US
Attorney for the Eastern District of California Benjamin Wagner, said in the
statement. 

“The impacts were
staggering. JP Morgan sold securities
knowing that many of the loans backing those certificates were toxic. Credit
unions, banks and other investor victims across the country, including many in
the Eastern District of California, continue to struggle with losses they
suffered as a result,” he said.

According to a report by Reuters,
JP Morgan's chief financial officer, speaking on a conference call, said the
bank had not admitted to violating any laws. CFO Marianne
Lake added that the facts
the bank admitted to did not leave it vulnerable in other litigation. In other
words, the bank and the government did not agree about what they had agreed to
in the settlement, capping weeks of squabbling over the terms of the deal, the
report said.

The blame game

Authorities say that the sort of conduct JP Morgan has
admitted is at the core of what caused the housing bubble and subsequent crash –
lenders providing risky mortgages and selling them to investors who thought they
were not running undue risks. The Justice Department said JP Morgan accepted it
had regularly and knowingly sold mortgages to investors that should have never
been sold.

The responsibility of banks like JP Morgan for the crisis is
not always clear when set against the actions of politicians and regulators. There
remain concerns that the actions of state-backed US
housing agencies, such as Freddie Mac and Fannie Mae, for example, helped fuel
the crisis by how they – encouraged by changes enacted by legislators – stood behind
many of the mortgages sold to the US public. A period of ultra-low
interest rates set by the US Federal Reserve is also cited by some commentators
as a driving force, as are actions of entities such as rating agencies and the
possibly perverse consequences of Basel bank capital rules, accounting
standards and risk models, and the “shadow banking” system of financial
securitization.

Laws

"As a result of this settlement and the proposed
settlement of
representation and warranty claims announced on Friday, November 15, the
company has resolved a significant portion of
the RMBS-related civil litigation claims being defended by the company,
and substantially all of the claims brought by federally insured and
federally controlled entities. JP Morgan Chase continues to cooperate
with the ongoing criminal investigation by the Department of Justice,"
the bank said in a statement late yesterday.

The blue-blooded bank had expected to be hit with a large
settlement deal and had provisioned for this in recent results. Recent months
have seen a number of blows for the bank. In September, UK and US regulators fined JP
Morgan a total of $920 million for “serious failings” relating to trades
carried out by the firm’s chief investment office and disclosed last year.

Until these issues arose, JP Morgan had been seen as one of
the few US
banks to have emerged from the 2008 financial crisis with its status enhanced.
The fine adds to those imposed on other firms for issues such as rigging
interbank interest rates, for example.

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