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Historic Settlement for JPMorgan - Analyst Blog
Putting an end to all speculation, JPMorgan Chase & Co. ( JPM ) arrived at a settlement with the President's RMBS Working Group of the Financial Fraud Enforcement Task Force. The company will pay $13 billion for the resolution of all the actual and probable civil claims related to the sale of residential mortgage-backed security (RMBS).
JPMorgan, Bear Stearns Cos. and Washington Mutual Inc. sold the RMBS before 2009. The company acquired Bear Stearns and Washington Mutual in 2008.
The Task Force comprised the Department of Justice (DOJ), several state Attorneys General (State AGs), the Federal Deposit Insurance Corp (FDIC), the National Credit Union Administration (NCUA) and the Federal Housing Finance Agency (FHFA).
Terms of the Settlement
Of the aggregate $13 billion settlement amount, $9 billion will be paid in cash to the above-mentioned regulators and State AGs, while the remaining amount will be used to provide assistance to the affected homeowners. The cash portion of the settlement consists of $2 billion of civil monetary fine to the DOJ.
The remaining $7 billion will be in compensatory payments, including roughly $4 billion related to the previously announced settlement with FHFA in October. Further, the states of California, Delaware, Illinois, Massachusetts and New York will together receive approximately $1.1 billion of compensation, while nearly $2 billion will be divided among FDIC and NCUA.
Of the aggregate amount to be used for providing assistance to homeowners, at least $1.5 billion will used to principle write-downs and nearly $500 million will be directed to modify terms of loans. The remaining $2 billion will aid new mortgage originations for low and medium-income borrowers, forgiving the remaining principal owed on properties that have been vacated but not foreclosed and the demolition of deserted homes.
JPMorgan remains committed to complete the delivery of relief to borrowers by 2017. Notably, an independent observer will supervise the company's progress in this respect.
JPMorgan did not admit any wrongdoing but at the same time accepted the Statement of Facts. The company also vouched its cooperation in the criminal investigation being undertaken by the DOJ.
End of Legal Woes?
Though the settlement resolves a major part of JPMorgan's RMBS-related issues, it does not obliterate the company's legal woes altogether. JPMorgan continues to face investigations from several federal agencies and a few foreign governments. The company's debt collection practices, alleged manipulation of London Interbank Offered Rate (LIBOR) and recruitment of the offspring of Chinese bureaucrats are being probed.
Further, JPMorgan stated that its future earnings will not be impacted by the aforesaid settlement. Last week, the company announced a settlement deal with nearly 21 institutional investors including BlackRock, Inc. ( BLK ), MetLife Inc., Freddie Mac ( FMCC ) and Fannie Mae ( FNMA ), among other. The company will pay $4.5 billion to investors who incurred losses on 330 RMBS trusts issued by JPMorgan and Bears Stearns.
Moreover, in the past few months, JPMorgan settled several other charges relating to the sale of home loans and MBS, its 'London Whale' debacle and the alleged manipulation of electricity prices in California and the Midwest region, among others. Consequently, the company raised its litigation reserves by $9 billion to nearly $23 billion at the end of the third quarter. Additionally, the bank expects legal losses (over and above its existing litigation reserves) of about $5.7 billion as of Sep 30, 2013.
At present, JPMorgan carries a Zacks Rank #3 (Hold).
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