JPMorgan faces criminal probe over mortgage bonds
Thursday, August 8, 2013
NEW YORK (AP) — The U.S. Justice Department is investigating JPMorgan Chase over mortgage-backed investments the bank sold in the run-up to the financial crisis.
The New York-based bank said in a regulatory filing that it is responding to investigations by the civil and criminal divisions of the U.S. Attorney’s office for the Eastern District of California. In May, the civil division informed JPMorgan that it had “preliminarily concluded” that the bank had violated federal securities laws in connection with certain mortgage-backed investments it sold from 2005 to 2007.
A JPMorgan spokeswoman declined to comment.
The disclosure is just the latest in a swirl of mortgage-related lawsuits and investigations that have hammered big U.S. banks in the aftermath of the financial crisis. The banks have been accused of improperly foreclosing on homeowners, discriminating against others and knowingly making loans to people who couldn’t afford them. Other probes, including the one disclosed by JPMorgan, have focused on mortgage-backed securities, where the banks bundled together their mortgages and sold them in slivers to investors.
JPMorgan didn’t give details on what the Justice Department is investigating. But previous lawsuits and investigations, against both JPMorgan and other big banks, have said that the banks misled investors about the quality of the loans they were buying. When the real estate bubble burst, many of the mortgage-backed securities soured and the investors who bought them lost billions.
If the investigations result in criminal or civil action by the Justice Department against JPMorgan, it would be the most high-profile government move against the bank to date. JPMorgan, which came through the financial crisis stronger than most of its competitors and was lauded for wise risk-management practices, has lately faced a slew of sanctions by federal regulators.
In January, regulators ordered the bank to take steps to correct poor risk management that led to a surprise trading loss last year of more than $6 billion. The Federal Reserve and the U.S. Comptroller of the Currency also cited JPMorgan for lapses in oversight that could allow the bank to be used for money laundering. Last month, the bank agreed to pay $410 million to settle allegations by the Federal Energy Regulatory Commission that it manipulated electricity prices in California and the Midwest.
An investigation by the Securities and Exchange Commission of the trading loss is nearing final stages with civil charges possible, according to news reports Thursday. The SEC is seeking an admission of wrongdoing from JPMorgan in a settlement, The Wall Street Journal and The New York Times reported, citing unnamed people familiar with the case.
That would be a departure from the SEC’s traditional policy of allowing most companies and individuals agreeing to settlements to neither admit nor deny wrongdoing. It would be a major application of a new policy announced recently by SEC Chairman Mary Jo White that calls for requiring admissions of wrongful conduct in some significant cases.
SEC spokesman John Nester declined comment on the reports.
The newly disclosed Justice Department investigations are not JPMorgan’s first legal headaches over mortgage-backed securities. It has settled charges from the SEC over mortgage-backed investments it made in the run-up to the financial crisis. It’s also facing lawsuits from the New York Attorney General’s Office and the National Credit Union Administration over the securities.
JPMorgan is fighting the attorney general’s lawsuit, which focused on investments sold by Bear Stearns in 2006 and 2007. JPMorgan bought Bear Stearns in 2008.
JPMorgan made the disclosure about the Justice Department investigations in a quarterly regulatory filing late Wednesday. It came a day after the U.S. government accused Bank of America of civil fraud, saying the company failed to disclose risks and misled investors in its sale of $850 million of mortgage bonds during 2008. The government says that the bank failed to tell investors that more than 70 percent of the mortgages backing the investment were written by mortgage brokers outside the banks’ network.
Bank of America has disputed those allegations, saying the investors who bought the securities had “ample access” to data about the mortgages.
“We are not responsible for the housing market collapse that caused mortgage loans to default at unprecedented rates and these securities to lose value as a result,” the bank said in a statement this week.
Shares of JPMorgan Chase & Co. slipped 47 cents, to close Thursday trading at $54.83. The stock has traded between $36.40 and $56.93 in the past 52 weeks, and remains up 25 percent since the start of the year.
AP Business Writer Marcy Gordon in Washington contributed to this report.
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