JPMorgan woes deepen as US demands $6bn penalty

August 27, 2013 7:23 pm

JPMorgan woes deepen as US demands $6bn penalty

By Kara Scannell and Tom Braithwaite in New York

US authorities are demanding JPMorgan Chase pay more than $6bn to settle allegations it mis-sold securities to government-backed mortgage companies in the run-up to the financial crisis, according to people familiar with the discussions. The bank is resisting the payment, which would be its single biggest penalty in a catalogue of expensive run-ins with US authorities and one of the largest post-crisis settlements by any bank, these people said.It dwarfs the amount that JPMorgan is expected to pay to settle regulatory action over its “London whale” trading scandal and exceeds the penalties for its alleged manipulation of commodities markets.

The Federal Housing Finance Agency, a government regulator, sued JPMorgan and 17 other banks in 2011. It said the bank falsely claimed that loans backing $33bn of mortgage-backed securities complied with underwriting guidelines and that it “significantly overstated the ability of the borrowers to repay their mortgage loans”.

The securities were sold to Fannie Mae and Freddie Mac, which guarantee US home loans and also buy securities for their own investment portfolio. As borrowers began to default in 2007, the value of the securities fell sharply. The FHFA is suing the banks in its role as regulator of Fannie and Freddie.

Although JPMorgan is refusing to pay the amount requested by the government, it expects to settle for billions of dollars, according to people familiar with the situation. The mounting potential price tag was partly responsible for a warning by the bank this month that its total legal bill could exceed cash put aside to cover it by $6.8bn.

It is still possible that JPMorgan could reach a lower settlement than $6bn or even win its case outright in court. But cases settled so far have seen banks pay out a high percentage of losses and banks are complaining that they have not had any significant rulings in their favour by the judge overseeing the case in the New York district court.

Last month UBS settled for $885m compared with original losses that were estimated at about $1.15bn. As the market recovered due to the improving economy, these were reduced to about $900m, said people familiar with the case, making the Swiss bank’s payment equal more than 90 per cent of the estimated losses.

The notional value of securities sold by JPMorgan are five times bigger than those sold by UBS. Unlike the UBS lawsuit, the case against JPMorgan and some of the other banks alleges fraud, which the government says makes the offence more serious and strengthens its claims for substantial damages.

One point of contention is that a large proportion of the securities were sold by Washington Mutual and Bear Stearns, which JPMorgan bought with the support of the government as they teetered during the crisis. Jamie Dimon, JPMorgan chief executive, has previously complained that the bank should not be punished for the alleged past misdeeds of those companies.

Also heavily exposed to the government’s lawsuits are Bank of America and the UK’sRoyal Bank of Scotland.

JPMorgan and the FHFA declined to comment.

Meanwhile there was a new arrest on Tuesday in relation to the “London whale” trading scandal in which JPMorgan lost more than $6bn on botched derivatives trades. Spanish police arrested Javier Martin-Artajo, the former JPMorgan Chase banker accused of hiding hundreds of millions of dollars in losses in the affair.

The arrest came just 10 days after US authorities charged Mr Martin-Artajo and Julien Grout, a junior bank employee, with falsifying bank records by artificially inflating the value of derivative trades to avoid losses.