Reports surfaced over the weekend that J.P. Morgan and the Justice Department had reached a $13 billion settlement over the bank's sale of mortgage-backed securities during the financial crisis.
At issue is the question of whether J.P. Morgan knowingly sold bad mortgages to investors. Under the tentative deal, the bank would pay $5 billion in penalties and $4 billion to settle claims that it intentionally misled investors about the mortgage-backed securities it sold to them, sources told the Wall Street Journal. The bank would also pay $4 billion in consumer relief to struggling homeowners. If accepted, the deal would settle pending civil investigations into the bank's sales of mortgages, according to Reuters.
The sale of mortgage-backed securities was a key factor in the financial crisis. These financial products consisted of large quantities of home mortgages that financial institutions bundled together and sold to investors. When homeowners started to default en masse in the recent housing crash, those mortgages went bad and investors lost billions of dollars.
That may make it sound as if J.P. Morgan is simply buying its way out of trouble, but there's plenty of potential pain ahead for the bank.
First of all, $13 billion is no insignificant sum, even for a large bank, representing a large chunk of its annual revenues and profits. In its latest annual report, the company reported just over $97 billion in net revenue and $21.3 billion in net income for 2012. $13 billion is also roughly twice the losses the company suffered when a rogue trader – the so-called "London Whale" – infamously lost billions taking on excessively large market positions in 2012. It's also by far the largest fine or settlement the company will have paid in the post-crisis era. The next-largest sum was a $1.8 billion settlement the bank paid out in 2012 and 2013 regarding its foreclosure practices, according to a USA Today analysis.
But $13 billion may still be the least of the bank's troubles going forward. JP Morgan CEO Jamie Dimon had pushed for the Justice Department to provide a "non-prosecution agreement," according to the New York Times, which would have ended a criminal prosecution in California. However, Attorney General Eric Holder stood firm, and that criminal investigation remains. In addition, JP Morgan will now have to cooperate with criminal investigations, according to USA Today.
As the deal is still tentative, it could fall apart as the two sides haggle over details. Meanwhile, investors seem to be at peace with the news. JP Morgan's stock price started the day Monday with a nearly 0.5 percent jump.