JPMorgan Faces Charges in Mortgage-Backed Security Sales

The big bank’s announcement comes just days after Bank of America was sued for its role in the crisis.

JPMorgan Chase offices in San Francisco in 2008.

The Justice Department is pursuing JPMorgan and the Bank of America under the Financial Institutions Reform, Recovery, and Enforcement Act.

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JPMorgan revealed Wednesday that the Justice Department is investigating the megabank for its role in the financial crisis. The bank said in a quarterly filing that it is facing criminal and civil investigations into its sales of mortgage-backed securities leading up to the financial crisis.

According to the filing, the U.S. Attorney's Office for the Eastern District of California is conducting investigations into mortgage-backed securities the bank and its subsidiaries sold in the runup to the crisis. Both the civil and criminal divisions of the office are looking into the matter, the bank indicated, adding that the civil division in May notified the bank it had "preliminarily concluded" that JPMorgan violated the law with some of its mortgage-backed securities sales in 2005 through 2007.

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JPMorgan also said it has "received, and responded to, a number of subpoenas and informal requests for information from other federal and state authorities concerning mortgage-related matters."

The bank declined to comment further on the investigations.

The announcement of the investigation makes this a big week for post-financial crisis law enforcement. The Justice Department also this week sued Bank of America for its sales of mortgage-backed securities, accusing the bank of understating the risks involved in those instruments. 

It's not news that the government has been increasingly investigating big banks for their roles in the crisis, says James Angel, associate professor of finance at Georgetown University's McDonough School of Business. He points to the 2012 State of the Union, when President Obama said he was asking Attorney General Eric Holder to "expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis."

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"The fact that it looks like some kind of regulatory sanction is coming down the path, that is the new part," says Angel. "My gut reaction is – what took them so long?"

The Justice Department is pursuing both banks under the Financial Institutions Reform, Recovery, and Enforcement Act, according to Bloomberg. The law has a 10-year statute of limitations for civil actions, however, meaning that the deadline for pursuing some of the charges against these banks is fast-approaching.

The investigations could add to what have already been hefty legal bills for JPMorgan. According to its filing, the bank accrued legal expenses of $1 billion in the first six months of 2013. In addition, the bank estimated that its losses dues to legal proceedings could reach $6.8 billion in excess of its reserves, as of June 30, 2013.

"There is no assurance that the Firm's litigation reserves will not need to be adjusted in the future," the bank added.


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