J.P Morgan’s massive fine could set industry precedent

US justice officials and bank regulators are hitting stride in settling accounts with the banking industry that brought the country’s financial system to its knees, five years after risky Wall Street securities sent the world spinning into recession. The 13-billion-dollar payment that J.P. Morgan Chase – the largest US bank by assets – reportedly agreed to over the weekend is the largest sum to date.

The settlement could establish a model for investigations of other financial institutions whose shaky mortgage securities were blamed for the near collapse of the US finance system in 2008, according to The New York Times. Wall Street’s golden boy, J.P. Morgan chief Jamie Dimon, harvested laurels for his work in emerging from the recession unscathed – one of the only large banks to have done so.

In late September, though, Dimon showed up at the Department of Justice, hat in hand, to negotiate with Attorney General Eric Holder in a bid to avoid the threat of civil charges over the mortgage securities. Dimon first offered 3 billion dollars, then 7 billion dollars, and finally 11 billion dollars, but Holder was still not satisfied, The Wall Street Journal reported at the time.

Finally, over the last weekend, the two agreed on 13 billion dollars – more than half of J.P. Morgan’s record 21.3-billion-dollar profit in 2012. According to the Journal, the total would include 4 billion dollars for consumer relief; 4 billion dollars for claims that J.P. Morgan had misled the government mortgage lenders Fannie Mae and Freddie Mac; and 5 billion dollars in penalties.

The deal is only tentative. The Justice Department has reportedly refused J.P. Morgan’s demands to drop state criminal investigations, such as those in California, and the bank has refused to admit guilt to criminal charges. The case involves the bank’s practices in issuing and bundling sub-prime housing loans into lucrative mortgage-backed securities. The bonds offered high returns but concealed huge risks when borrowers began defaulting at higher rates in 2007-08.

Too many mortgages were issued to people who were unlikely to be able to pay off their loans if home values fell. When the economy slowed and workers began losing jobs, the real estate bubble burst, millions of homes were foreclosed. Among the multitude of civil cases against banks are those from the Federal Housing Finance Agency (FHFA), which is trying to recoup the 187.5 billion dollars of taxpayer money that helped keep it afloat.

The FHFA accuses J.P. Morgan and its affiliates of making false statements in selling 33 billion dollars in mortgage bonds to Fannie Mae and Freddie Mac, according to Bloomberg news agency. To date, the government has already levied billions of dollars in fines and penalties for such misconduct.

In 2011, Goldman Sachs paid a 550-million-dollar fine. The same year, Bank of America paid out 8.5 billion dollars to investors who had sued. J.P. Morgan was highly praised at the time for taking over two floundering firms – Bear Stearns and Washington Mutual – in the midst of the financial upheaval, sparing a government rescue in those two cases. That move, and its market resilience, earned it a “teacher’s pet” position with the Obama administration.

But that relationship cooled after Dimon geared up Wall Street to resist proposed regulatory reforms intended to prevent another such runaway crisis. J.P. Morgan’s star continued to fall as one of the most reckless trading debacles in banking history – the astounding loss of 6.2 billion dollars in 2012 from high-risk derivatives trading in London – was revealed early this year.

In September, US and British authorities said they had fined J.P. Morgan a combined 920 million dollars over the London scandal. Financial regulators accused the bank of a range of potentially fraudulent acts, including using manipulation to increase profits in the energy market. And several other regulators were investigating the bank for inaccuracies in its accounts on credit card customers and whether the bank failed to report suspicious transactions by convicted billion-dollar Ponzi scheme perpetrator Bernard Madoff.