Employees of JPMorgan and two firms it acquired knew that some of the loans included in the mortgage bonds didn't meet underwriting standards, a fact not shared with buyers of those securities, the U.S. Justice Department said yesterday in a statement. That doesn't mean the company misled investors, said JPMorgan's chief financial officer, Marianne Lake, disputing how some state and federal officials characterized the deal.
JPMorgan, the biggest U.S. bank, sought to end one of the largest legal uncertainties it faced without providing ammunition to private litigants. The company is still the subject of Justice Department probes into its energy-trading business, recruiting practices in Asia and its relationship with Ponzi scheme operator Bernard Madoff.
The stock market reacted enthusiastically to the news; JPMorgan's stock price rose 0.7 percent to $56.15 yesterday and added 18 cents by mid-morning today, Bloomberg said. JPMorgan's stock price has increased 38 percent in the past 12 months, outperforming the Standard & Poor's financials index and the S&P 500.
The government called the settlement the largest in U.S. history, but the deal is really several rolled into one, Reuters reported.
Of the $13 billion settlement, $4 billion is for a consumer relief package, $4 billion will be paid to the Federal Housing Finance Agency, which oversees the government mortgage financing companies Fannie Mae and Freddie Mac, and $5 billion is for a civil penalty to the Justice Department and claims from other state and federal government entities.
After taxes, the settlement should cost JPMorgan about $9 billion, because about $11 billion of the settlement is tax-deductible, said Gregg Polsky, a law professor at the University of North Carolina. The bank said last month it had set aside $23 billion to cover litigation expenses.