JPMorgan reaches tentative $4.5 billion deal with investors

Massive settlement over bad mortgages during the financial crisis is latest in string of high profile pay-outs

The bank could end up paying out in fines as much as it made in 2012.

The bad news continued to pile up for JPMorgan Chase & Co. with Friday’s announcement of a $4.5 billion settlement reached with investors who said the bank deceived them about bad mortgage investments, part of a string of recent legal deals that contributed to the nation’s largest bank rare third quarter loss this year.

The newest settlement covers 21 major institutional investors, including JPMorgan competitor Goldman Sachs, BlackRock Financial Management and Metropolitan Life Insurance Co. The mortgage-backed securities were sold by JPMorgan and Bear Stearns between 2005 and 2008.

As the housing market collapsed between 2006 and 2008, millions of homeowners defaulted on high-risk mortgages. That led to billions of dollars in losses for investors who bought securities created from bundles of mortgages. Those securities were sold by JPMorgan and other big Wall Street banks.

Separately, JPMorgan has been negotiating with the U.S. Justice Department to settle a civil inquiry into its sales of mortgage-backed securities. While that case has yet to be full resolved, the bank reached a tentative deal last month to pay $13 billion.

As part of the $13 billion settlement, $4 billion will resolve U.S. government claims that JPMorgan misled mortgage finance giants Fannie Mae and Freddie Mac about risky mortgage-backed securities. Fannie and Freddie were bailed out by the government during the crisis and are under federal control.

Still to be decided is whether the Justice Department will file criminal charges against JPMorgan in the mortgage securities debacle. An investigation is underway by the U.S. attorney's office in Sacramento, Calif.

In other recent fines, JPMorgan agreed to pay $920 million dollars to U.S. and U.K. regulators in a settlement over the “London Whale” scandal, where the bank admitted to wrongdoing in a case involving its $6 billion 2012 trading loss. In a separate case, it agreed to pay a $410 million fine in July for manipulating prices in several U.S. energy markets.

Mounting legal costs pushed JPMorgan to a rare loss in this year's third quarter, the first under Jamie Dimon's leadership, who also survived a May shareholders vote to remain chairman of the bank, where he is also CEO and president. The bank reported Oct. 11 that it set aside $9.2 billion in the July-September quarter to cover the string of legal cases against the bank. JPMorgan said it has placed a total of $23 billion in reserve to cover potential costs.

The $4.5 billion that JPMorgan is paying investors compares with its record net income of $21.3 billion in 2012, which made it one of the most profitable U.S. banks last year.

Goldman Sachs, Citigroup and other big banks have been accused by the Securities and Exchange Commission of deceiving investors in sales of mortgage securities in the run-up to the crisis. Together they have paid hundreds of millions in penalties to settle civil charges brought by the SEC.

JPMorgan settled SEC charges in June 2011 by agreeing to pay $153.6 million and reached another such agreement for $296.9 million last November.

Al Jazeera and The Associated Press

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