Key Takeaways From JPMorgan’s Mammoth Settlement Of Legacy Mortgage Issues
JPMorgan Chase (NYSE:JPM) has been working at a frantic pace to clear its huge backlog of legacy mortgage-related disputes over the last couple of months. Judging by the multi-billion dollar settlements the diversified banking group announced over the past few days, it looks like the effort has finally paid off with the bank closing the curtains on the biggest legal liabilities it had been battling since the economic downturn.
JPMorgan first reached an accord with a group of 21 major institutional investors over mortgage-backed securities (MBS) sold by its subsidiaries (including Bear Stearns, which the group acquired at the peak of the downturn) between 2005 and 2008. [1] The investors that benefit from this settlement include BlackRock (NYSE:BLK), Goldman Sachs (NYSE:GS), Pimco and Metlife (NYSE:MET) among others. Quite notably, the $4.5 billion settlement leaves out MBS issued by Washington Mutual – the other financial giant acquired by JPMorgan during the economic crisis – which means that they remain a source of concern for the time being.
The bank followed up with a much-awaited $13 billion settlement with the government earlier this week, putting to rest all actual and potential MBS-related civil litigation by the DoJ, FDIC, NCUA, FHFA as well as the Attorneys Generals of several states against JPMorgan Chase, Bear Stearns and Washington Mutual. [2]
We maintain our $60 price estimate for JPMorgan’s shares, as the bank had already set aside the cash needed to cover these settlement in the third quarter.
See our full analysis of JPMorgan
JPMorgan’s settlement with the RMBS Working Group of the Financial Fraud Enforcement Task Force marks the first such deal between a bank and the task force, which was created specifically to make the country’s biggest financial institutions pay for improper practices that had a big role in fueling the financial crisis of 2008. This is also the largest settlement amount between the government and any company – dwarfing the $4 billion BP paid for its oil spill in the Gulf of Mexico in 2010. With JPMorgan out of the way, the task force will likely shift its focus towards other banking giants such as Bank of America and Citigroup.
The $13 billion figure includes:
- $9 billion in cash payments, of which
- $2 billion is a civil monetary penalty to the federal government
- $7 billion will be routed towards compensatory payments, including the $4 billion settlement amount with the FHFA which was announced in late October (see JPMorgan’s $5.1 Billion Mortgage Settlement Doesn’t Impact Its $60 Price Estimate) and a $1 billion payment to the states of New York, California, Massachusetts and Illinois.
- $4 billion in borrower relief. JPMorgan will channel this amount towards the worst-affected home-owners either directly (through principal reductions and delayed foreclosures) or indirectly (through various relief programs)
What limits JPMorgan’s legal liability from similar litigation by private investors is the fact that the bank did not admit to any wrongdoing as a part of the incident. [3] The settlement does not cover any potential criminal charges against JPMorgan, which the DoJ is currently investigating.
JPMorgan’s settlement with 21 institutional investors is largely in line with the controversial $8.5 billion settlement competitor Bank of America reached with almost the same set of investors, and seeks to put to rest a large chunk of the securities sold by JPMorgan Chase as well as Bear Stearns to private investors in the run-up to the economic downturn.
So what can we expect from JPMorgan over coming months? The bank will most likely try to close the loop on other pending claims – with the next big chunk being from monoline insurers like Ambac. With the bank already choosing to accept all of Washington Mutual’s liabilities as a part of its agreement with the government, another settlement with private investors valued at roughly $1.5 billion can be expected in the near future to cover MBS issued by WaMu. [4] As was estimated by the bank’s in its recent quarterly 10-Q filing, the string of potential settlements may require it to add an additional $5.7 billion in litigation reserves.
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Notes:- JPMorgan Chase Reaches An Agreement With 21 Institutional Investors To Resolve Repurchase And Servicing Claims, JPMorgan Press Releases, Nov 15 2013 [↩]
- JPMorgan Chase Reaches Settlement With The President’s Task Force On Residential Mortgage-Backed Securities, JPMorgan Press Releases, Nov 19 2013 [↩]
- Statement Of Facts, DoJ Website, Nov 19 2013 [↩]
- JPMorgan agrees to shoulder WaMu bill, Financial Times, Nov 18 2013 [↩]