The federal government on Tuesday announced its much-anticipated JPMorgan Chase settlement, in which the nation’s largest bank agreed to fork over $13 billion in reparations and admit that it peddled fraudulent securities.
As part of the settlement, California’s two largest public employee pension funds will receive nearly $300 million. Billions also will be set aside to help homeowners still struggling from the effects of the worst economic downturn since the Great Depression.
The announcement came from U.S. Attorney Benjamin Wagner in Sacramento and U.S. Attorney General Eric Holder in Washington, D.C.
“It is the federal government’s largest single-company civil settlement ever,” Wagner said at a news conference in his Sacramento office.
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Wagner was a key player in the settlement, partially due to a year-old investigation of JPMorgan by four attorneys on his staff. That, plus the office’s aggressive pursuit of rampant mortgage fraud in the Central Valley, led to high-ranking Justice officials allowing Wagner to carry the ball in a high-profile Wall Street investigation.
He noted Tuesday that, from the early 2000s through 2008, JPMorgan was not the only bank to engage in the type of misconduct it has now acknowledged. However, Wagner said, the bank’s actions are “symptomatic of the recklessness on Wall Street which led to the financial crisis in 2008.”
The acknowledged facts include some relating to the same type of fraudulent conduct by employees of two other banks, Bear Stearns and Washington Mutual, before JPMorgan acquired them in 2008.
The bank knowingly bought up thousands of residential mortgage-backed loans that were “non-compliant with applicable underwriting guidelines” and packaged them as securities, Wagner said. “It promoted its supposedly robust due diligence through prospectuses,” but there was a “wide disparity” between the message of those marketing tools and what bank officers actually learned from the due diligence process, he said.
Billions of dollars in non-prime securities were backed by mortgage loans secured by properties with inflated appraisals, supported by inaccurate loan-to-value or debt-to-income ratios, or were “originated in violation of federal and state laws and regulations,” Wagner said.
“Some of the loans had no value at all,” he added.
“JPM injected this bad paper into the securities market, with negative consequences to the world economy,” he said. “The impacts were staggering. Credit unions, commercial banks and many other victim investors across the country, including some in (California), suffered billions of dollars in losses.”
Wagner’s office is still in the midst of a criminal probe of JPMorgan, but he would not offer any details.
Wagner did say the civil investigation turned up evidence going to the culpability of some bank supervisors and managers who made critical decisions regarding the purchase of toxic loans and their sale to unsuspecting investors as sound securities.
He also said that, as part of the civil settlement, JPMorgan agreed to fully cooperate with the criminal investigation. He said he had some of his top white-collar-crime prosecutors working on it.
The civil probe was conducted by Assistant U.S. Attorneys Rich Elias, Colleen Kennedy and Kelli Taylor, with David Shelledy, chief of the office’s civil division, “helping to finalize this settlement agreement,” Wagner said. The four attorneys flanked him at the news conference.
“I would not be here making this announcement, and it is quite possible that this settlement would never have happened, were it not for their outstanding work,” he said. “Their work resulted in the collection of some compelling evidence, which ultimately led to the settlement.”
Both big and small institutional investors will share in the pot of money. The investors bought the securities based on the deliberate misinformation propagated by JPMorgan, Wagner said.
The California Public Employees’ Retirement System and the California State Teachers’ Retirement System – more commonly known as CalPERS and CalSTRS – will draw $298,973,000 in damages: about $261 million to CalPERS and $19.5 million plus interest to CalSTRS, with a share of the remainder going to the California attorney general’s office for fees.
“JPMorgan Chase profited by giving California’s pension funds incomplete information about mortgage investments,” state Attorney General Kamala Harris said Tuesday in a statement.
The settlement “helps bring closure and justice in this matter for those who were harmed, and it holds JPMorgan accountable for its actions,” CalPERS investment committee chairman Henry Jones said in a statement.
The bank will pay $7 billion to various federally insured investors and to four other states to resolve their claims.
In addition, JPMorgan has agreed to spend $4 billion by the end of 2016 on a package of consumer-relief measures that will benefit hard-pressed homeowners who are underwater on their mortgages. One facet of the program will make new loans available to low- and moderate-income borrowers. Another facet will help address blight in urban neighborhoods that were devastated by the economic meltdown.
The bank will also pay $2 billion to the Justice Department to resolve potential civil claims by Wagner’s office. It is the largest civil penalty ever assessed against a bank for unsound mortgage-backed securities.
Holder said in a statement: “The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over.”