Banking giant J.P. Morgan Chase & Co. (JPM) shrugged off this weekend’s news that it was near an agreement to pay the federal government a $13 billion settlement for selling suspect mortgage-backed securities in the run-up to the housing crisis. The company’s stock declined just over 0.5 percent on Monday, suggesting that much of the settlement amount may have already been priced in by the markets. The agreement, which is expected to be finalized later this week, could be an important bellweather as other major banks, most notably Royal Bank of Scotland ($RBS) and Bank of America (BAC) , look to either settle similar suits against them or fight them in court.
Massive Settlement
The $13 billion settlement covered civil cases pending with the Justice Department, New York Attorney General, and the Federal Housing Finance Agency (FHFA). Of the $13 billion, $4 is earmarked for the FHFA and another $4 billion will go to a consumer-relief fund with the remaining $5 billion being used to settle matters with the Justice Department and the New York Attorney General.
“It looks like they are gradually becoming able to put the past and the crisis behind them,” said University of Houston finance professor Craig Pirrong. “It’s an expensive history lesson, and they are not out of the woods yet.”
The reported size of the pending agreement is $2 billion more than the previously reported sum proposed last month, and represents the largest settlement by a financial firm in history. The tentative agreement was reached after a phone call between J.P. Morgan Chairman & CEO Jamie Dimon and Attorney General Eric Holder on Friday afternoon.
No Settlement of Potential Criminal Cases
Not included in the record settlement was any immunity from criminal prosecution, something that many observers had expected given the size of the deal.
“To not get the waiver from criminal prosecution is not good,” said Nancy Bush, founder of NAB Research LLC. “What we’re looking for in a settlement of this size is certainty from things like the criminal prosecution of a company. The Street wants certainty.”
Eric Holder reportedly insisted that the bank not be released from criminal liability given that the investigations into its activities are ongoing. Author and BloombergView contributor William Cohan, though, views some of the settlement as being a risk that J.P. Morgan opted to take on when they made timely investments in other institutions during the 2008 market crash.
“JPM Chase got a great deal on Bear Stearns – they got a great deal on Washington Mutual,” he says. “They bought the equity of these companies; that means they also bought the liabilities. They had to anticipate this – they’re not idiots.”
First of Many?
J.P. Morgan’s settlement may just make them the first of the major investment institutions to settle for misdeeds committed during the housing bubble.
“JPMorgan Chase is just the first domino in what’s going to be a series of large civil settlements with large payments from Wall Street,” says Cohan. “There’s going to be more of this to come.”
And a story in the Financial Times on Monday morning would appear to corroborate this, reporting that FHFA regulators are pushing for a $6 billion fee as part of any settlement with Bank of America (BAC) . In total, the FHFA has filed suit against 17 different financial institutions that assert that they broke securities laws when selling mortgage-backed securities to Fannie Mae and Freddie Mac.
If other insitutions go the same route as J.P. Morgan, it seems entirely possible that their potential record for the size of the settlement won’t stand for long. Other companies with Royal Bank of Scotland ($RBS), Deutsche Bank (DB) , Credit Suisse (CS) , Barclays (BCS) , and Goldman Sachs (GS) all facing lawsuits. General Electric (GE) , Citigroup (C) , and UBS AG (UBS) have already settled.
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