JPMorgan Chase, seeking to avert a wave of litigation from the government, is negotiating a multibillion-dollar settlement with state and federal agencies over the bank's sale of troubled mortgage securities to investors in the run-up to the financial crisis.
During settlement talks this week, proposals emerged that would require JPMorgan to pay anywhere from $3 billion to about $7 billion, people briefed on the negotiations said. The settlement, the people said, might also require JPMorgan to provide some financial relief for struggling homeowners. Although the ultimate amount is still in flux, it is clear that any deal would dwarf the size of other settlements the bank has reached to resolve separate regulatory issues.
The talks, which involve the Justice Department, the Department of Housing and Urban Development and the New York attorney general's office, continued on Tuesday without resulting in a final deal. The people briefed on the negotiations, who were not authorized to speak publicly, cautioned that terms were shifting and that the talks could fall apart.
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Aside from negotiating the size of a financial fine, the people said, the talks are centered on which investigations and pending lawsuits to sweep into the potentially wide-ranging settlement. The pact could resolve investigations led by a specialized group at the Justice Department focused on mortgage securities cases. It could also include lawsuits filed by Eric T. Schneiderman, the New York attorney general, and the Federal Housing Finance Agency. The agency is focused on mortgage securities that JPMorgan sold to Fannie Mae and Freddie Mac, the government-controlled housing finance giants.
The negotiations this week appeared to delay a lawsuit from the United States attorney's office for the Eastern District of California. The office, the people said, initially planned to sue JPMorgan as soon as Tuesday over accusations that the bank flouted federal laws with its sale of subprime mortgage securities from 2005 to 2007. It is unclear whether the Justice Department will now fold that case into a broader settlement.
The talks in the mortgage investigations reflect the depth of JPMorgan's legal woes.
All told, the bank faces investigations from at least seven federal agencies, several state regulators and two foreign governments. In addition to the scrutiny of its crisis-era mortgage business, the investigations involve JPMorgan's debt collection practices and its hiring of the children of Chinese officials.
As it confronts the investigations, JPMorgan faces a strategic dilemma. If it settles with the authorities, the bank must pay large sums to the government. But if it fights, the bank may anger those same authorities, prompting years of costly litigation.
Last week, JPMorgan opted for the conciliatory approach. Taking an initial step toward resolving its regulatory problems, the bank struck a $920 million settlement over a $6 billion trading loss in London last year. The cases, known as the London Whale episode for the outsize nature of the positions, resolved inquiries from four agencies: the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve and the Financial Conduct Authority in London.
In their orders, the regulators highlighted "severe breakdowns" in internal controls surrounding the losses. The bank, regulators said, failed to prevent a group of traders in London from amassing the risky bet. And when losses mounted, the authorities say, the traders "inflated the value" of their positions to mask their losses.
Although no executive was charged in the cases, JPMorgan took the unusual step of acknowledging that it had violated federal securities laws. The traders, who deny wrongdoing, also face both civil and criminal charges.
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"We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them," Jamie Dimon, the bank's chief executive, said in a statement last week.
The bank added that "the settlements are a major step in the firm's ongoing efforts to put these issues behind it."
Yet the JPMorgan losses still face scrutiny from the Commodity Futures Trading Commission. The agency, which suspects that the trading was so large that it manipulated the market for financial contracts known as derivatives, was not part of last week's settlement and is continuing to negotiate with the bank.
The wrangling over the mortgage investigation also has persisted. Negotiations have occurred in spurts, with various sums being proposed by both the government and the bank.
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The New York Times on Tuesday reported the existence of the mortgage settlement talks, including one discussion in which a roughly $20 billion fine was briefly floated.
But the Department of Housing and Urban Development, which was identified in the article as having suggested that amount, said in a statement on Tuesday that "no one at this agency — including the secretary — ever floated a $20 billion settlement figure."
The department's statement did confirm that it was "involved in multiparty negotiations to reach a settlement." Representatives of the agency did not return messages on Monday seeking comment.