Massachusetts will receive more than $34 million as part of the $13 billion settlement reached Tuesday between the Justice Department and JPMorgan Chase & Co. over the firm’s sale of low-quality mortgage-backed securities that collapsed in value during the housing bust and helped spark the recent financial crisis.
The settlement, the largest against a single company in the nation’s history, resolves numerous federal and state civil claims against practices by JPMorgan and two failing banks it acquired in 2008 at the US government’s urging, Bear Stearns and Washington Mutual.
In Massachusetts, a portion of the $34.4 million will go to fines, attorney fees, homeowners hurt by questionable mortgage practices, and the Pension Reserves Investment Management Board, which is responsible for investing public retirement funds.
“This settlement today is part of our ongoing effort to hold Wall Street accountable for its role in the financial crisis,” said Martha Coakley, the Massachusetts attorney general.
Coakley’s office has not determined how much of Massachusetts’ share will go to homeowner relief and how that money will be disbursed. In the past, a settlement with a particular bank has resulted in reduced principal for struggling homeowners who were saddled with subprime mortgages.
In the run-up to the crisis, Wall Street banks were buying mortgages and bundling them into securities to sell to investors. Many of these mortgages, however, were, subprime loans with short-term teaser rates that were sold to consumers with spotty credit histories.
Banks often understated the risks of the mortgage-backed securities. When the housing market crashed, however, many homeowners stopped paying their mortgages, which drove down the value of the securities.
JPMorgan’s is the latest settlement regarding mortgage-backed securities that has resulted in money for the state, homeowners, and investors. Since 2009, four companies, including Goldman Sachs Group, Morgan Stanley, Royal Bank of Scotland, and Barclays Bank PLC, have paid $250 million to Massachusetts and its homeowners.
The JPMorgan settlement came out of President Obama’s financial fraud enforcement task force. Nonetheless, the Obama administration has been criticized in the past for failing to vigorously pursue legal action against Wall Street companies that contributed to the financial crisis. On Tuesday, US Attorney General Eric Holder suggested in a statement that the agency is pursuing investigations of other companies, too.
“JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior,” 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.”
Under the settlement, the nation’s biggest bank will pay more than $7 billion to compensate investors, $4 billion to help struggling homeowners, and $2 billion as fines.
Of the money going to investors, $4 billion will resolve government claims that JPMorgan misled mortgage finance giants Fannie Mae and Freddie Mac about risky mortgage securities the bank sold them before the housing market crashed. That part of the deal was announced on Oct. 25. Fannie and Freddie, then private companies, were taken over by the government as part of a bailout.
Still undecided is whether the Justice Department will file criminal charges against JPMorgan. An investigation is underway by the US attorney’s office in Sacramento.
The $13 billion JPMorgan will pay under the settlement is a little more than half of the company’s record 2012 net income of $21.3 billion.
Mounting legal costs from government proceedings pushed JPMorgan to a rare loss in this year’s third quarter, which ended in September.
The Justice Department is targeting other banks. In August, Bank of America Corp., the second-largest US retail bank, was accused of civil fraud in failing to disclose risks and misleading investors in its sale of $850 million in mortgage bonds in 2008. The Securities and Exchange Commission filed a related lawsuit. The government estimates that investors lost more than $100 million from the bonds sold by Bank of America. Bank of America disputes the allegations.