Saturday, October 26, 2013

JP Morgan's Settlement of Duplicity Charges

Yesterday, JP Morgan Chase agreed to settle claims that it sold toxic mortgages to government-sponsored enterprises Fannie Mae and Freddie Mac by misrepresenting the quality of the mortgages that it sold to the GSE's during the run-up to the financial market crisis.  JP Morgan agreed to pay $5.1 billion dollars to Fannie Mae and Freddie Mac disclaiming wrongdoing but adding to a rough year of controversy for the Wall Street banking giant.

According to CNN/Money: "The claims relate to conduct at JPMorgan and at Bear Stearns and Washington Mutual, which JPMorgan purchased in 2008. At issue are allegations that the firms sold risky mortgages and mortgage securities while misrepresenting their quality. Among the purchasers were Fannie Mae and Freddie Mac, the government-backed housing finance giants that required a massive bailout in 2008 when their housing investments soured. The deal was announced by the Federal Housing Finance Agency, which has overseen Fannie and Freddie since their 2008 rescue. . . .

JPMorgan will pay $4 billion to resolve claims related to the alleged misrepresentation of mortgage-backed securities - investment products created by bundling payments from individual loans. It will also repurchase $1.1 billion worth of mortgages sold to Fannie and Freddie between 2000 and 2008 that the firms say do not meet their quality standards."

According to Bloomberg:  "The [Federal Housing Finance Authority] had accused JPMorgan and its affiliates of making false statements and omitting material facts in selling about $33 billion in mortgage bonds to the two companies [Fannie and Freddie] from Sept. 7, 2005, through Sept. 19, 2007.  Executives at JPMorgan, Washington Mutual and Bear Stearns Cos., which was also acquired by JPMorgan in 2008, knowingly misrepresented the quality of the loans underlying the bonds, the regulator wrote in the lawsuit in federal court in Manhattan."

Interestingly, in the early post-market crash days, when individuals were rushing to place blame, a clear vocal minority attempted to place full blame for the mortgage crisis on Fannie Mae and Freddie Mac basically arguing that the GSE's created an environment where mortgages of all sizes and shapes would be repurchased by the GSE's, sans standards.  Now, with JP Morgan agreeing to buy back over $1 billion in mortgages and mortgage-backed securities that it misrepresented to the GSE's in the first place, it appears clear that the quality of mortgages sold to the housing giants were fraudulently misrepresented, as historic standards existed for the GSE's in what types of mortgages it would actually purchase from private banks.  Fraud, essentially, was engaged in by Wall Street and commercial banks like Washington Mutual, Countrywide, JP Morgan, Bear Stearns, etc., leading in part to the mortgage crisis that continues to hinder economic growth today.

Despite engaging in alleged fraud, $5.1 billion represents just a fraction of JP Morgan's profits.  "JPMorgan is large enough to easily absorb the settlement costs. It's the biggest bank in the nation, with assets of $2.5 trillion and net income of $21.3 billion in 2012."  That said, "[t]he bank has been buffeted by legal problems in the past few months, however. It has paid over $1 billion in fines in connection with last year's 'London Whale' trading debacle, and $80 million more over its allegedly unfair credit card billing practices."

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