MANHATTAN (CN) - JPMorgan Chase will pay $14 billion to settle charges over its predecessor's role in setting off the U.S. economic crisis, the Justice Department said Tuesday.
It had been just over 13 months ago when President Barack Obama's then-new mortgage fraud task force set its sights on the bank as its first courtroom opponent.
New York State Attorney General Eric Schneiderman, who co-chairs the task force, filed the lawsuit in Manhattan Supreme Court days before the presidential debates.
Schneiderman touted "one set of rules for all" to drown out popular outrage against "too big to fail" banks.
Though JPMorgan had been one of five banks implicated earlier that year in a $25 million deal reached for Merscorp's end-run on the traditional public recording system, Schneiderman insisted at the time that the settlement did not clear the company from other claims.
The task force's suit took aim at the packaging, marketing, sale and issuance of residential mortgage-backed securities (RMBS) by JPMorgan, Bear Stearns and Washington Mutual prior to Jan. 1, 2009. As
JPMorgan acquired Bear Stearns, the global investment bank whose collapse helped trigger the 2008 financial meltdown, after its shares dove down from $133.20 per share to $10.00 per share, its final purchase price.
Three years later, JPMorgan bought Bear Stearns' subsidiary EMC Mortgage.
Schneiderman said the megabank bought their alleged liabilities along with the deals.
Despite promises that it screened out bad loans through an "intensive," "prudent," and "robust" due-diligence process, Bear Stearns contracted with firms whose "productivity goals" made the screening process impossible, the complaint states.
Eventually, the underwriting of toxic loans at Bear Stearns led to "astounding" losses of about $22.*5 billion between 2006 and 2007, more than a quarter of its original principal balance of $87 billion, the attorney general said.
The Justice Department touted the $13 billion settlement with JPMorgan on Tuesday as the largest deal with a single entity in American history.
"As part of the settlement, JPMorgan acknowledged it made serious misrepresentations to the public - including the investing public - about numerous RMBS transactions," it said in a statement. "The resolution also requires JPMorgan to provide much needed relief to underwater homeowners and potential homebuyers, including those in distressed areas of the country. The settlement does not absolve JPMorgan or its employees from facing any possible criminal charges."
In a statement of facts, JPMorgan acknowledged that it regularly represented to RMBS investors that the mortgage loans in various securities complied with underwriting guidelines.
In reality, however, JPMorgan employees knew that the certain loans in question did not comply with those guidelines and were not otherwise appropriate for securitization, according to the statement of facts.
JPMorgan nevertheless allowed the loans to be securitized then sold without informing investors.
Such bundling of toxic loans into securities is said to have contributed to the financial crisis.
Federal and state civil claims by various entities related to RMBS will take $9 billion of the $13 billion resolution. JPMorgan will pay $2 billion of that amount as a civil penalty to settle the Justice Department claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), $1.4 billion to settle federal and state securities claims by the National Credit Union Administration (NCUA), $515.4 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC), $4 billion to settle federal and state claims by the Federal Housing Finance Agency (FHFA), $298.9 million to settle claims by the state of California, $19.7 million to settle claims by the state of Delaware, $100 million to settle claims by the state of Illinois, $34.4 million to settle claims by the commonwealth of Massachusetts, and $613.8 million to settle claims by the state of New York.
Consumers harmed by the banks' unlawful conduct are owed the remaining $4 billion from JPMorgan.
That aid will take the forms of principal forgiveness, loan modification, targeted originations and efforts to reduce blight.
JPMorgan has until Dec. 31, 2017, to meet its obligations, under the oversight of an independent monitor, or be compelled to pay a nonprofit liquidated damages.
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