By Aruna Viswanatha and David Henry
WASHINGTON/NEW YORK, Oct 19 (Reuters) - JPMorgan Chase & Co has reached a tentative $13 billion deal with the U.S.Justice Department and other government agencies to settleinvestigations into bad mortgage loans the bank sold toinvestors before the financial crisis, a source familiar withthe talks said on Saturday.
The tentative deal, the largest ever between the U.S.government and a single company, does not release the bank fromcriminal liability for some of the mortgages it packaged intobonds and sold to investors.
That had been a major sticking point in the discussions, butthe government refused to budge on that issue and JPMorgan feltit had no choice but to give in, according to a second source.Until recently, the most that JPMorgan was willing to pay wascloser to $11 billion.
The ongoing criminal investigation underscores how even ifthis settlement takes some heat off JPMorgan Chief ExecutiveJamie Dimon, he still has myriad regulatory issues to deal with.
The biggest U.S. bank sidestepped the worst of the financialcrisis but now faces more than a dozen probes globally intoeverything from alleged bribery in China to a possible role inmanipulating benchmark interest rates known as Libor.
While JPMorgan investors have publicly supported Dimon,privately many have expressed frustration at his run-ins withregulators. A Senate subcommittee report in March detailed howDimon demanded that subordinates withhold data from one of thebank's regulators, the Office of the Comptroller of theCurrency. Earlier this month, the bank said that Dimon was nolonger chairman of JPMorgan's main U.S. retail bankingsubsidiary, which press reports said happened at the request ofthe OCC.
JPMorgan's board of directors has pressured Dimon to improvehis relationship with government regulators and enforcementofficials.
The preliminary $13 billion settlement was reached after hespoke by phone on Friday night with U.S. Attorney General EricHolder to finalize the broad outlines of the deal, the firstsource said. Dimon went to Washington to meet with Holder onSept. 25, and discussed an $11 billion deal at that point.
"They are trying to do whatever they can to get this behindthem," said Walter Todd, chief investment officer at GreenwoodCapital Associates, which owns JPMorgan shares.
At issue in the settlement is whether the bank soldmortgages that it knew were riskier than they appeared.Investors, including government-owned mortgage agencies FannieMae and Freddie Mac, said that the bank told them loans werebetter than they actually were, or that the bank was negligentin accepting information from borrowers about their income andother matters at face value instead of verifying it.
Some 80 percent of the securities in the $13 billionsettlement relate to investment bank Bear Stearns and mortgagelender Washington Mutual, which the government encouragedJPMorgan to buy after they essentially failed during the crisis.
The banks bolstered JPMorgan's bond trading and consumerbanking businesses, and helped propel JPMorgan to recordquarterly profits. But the legal costs connected with BearStearns and Washington Mutual have weighed on JPMorgan.
In the third quarter, the bank lost $380 million, its firstquarterly loss since 2004, after it recorded a $7.2 billionafter-tax charge for legal expenses. On a call with analysts,Dimon acknowledged that the losses from Bear Stearns andWashington Mutual were "very painful to the company."
Even so, the bank can easily afford this deal. It saidearlier this month that it has set aside a total of $23 billionto cover legal settlements. In a typical quarter, it earns about$5 billion to $6 billion, and it has some $30 billion of cash onits books.
The Justice Department is leading the conversations betweena host of government agencies and JPMorgan, the largest U.S.bank. As part of the deal, the bank will continue to cooperatein criminal inquiries into people involved in the conduct atissue, said the first source, and JPMorgan itself could stillface criminal charges.
The settlement includes a $4 billion tentative deal with theFederal Housing Finance Agency that sources told Reuters aboutearlier this week.
A third source close to the matter characterized a broader$13 billion deal as likely, but cautioned that parts of theagreement are still being hammered out, and the settlement couldconceivably fall apart. The bank's general counsel StephenCutler and Associate Attorney General Tony West are negotiatinga statement of facts that will be part of a final agreement, thefirst source said.
Settlement talks started in September, as the JusticeDepartment prepared to sue JPMorgan in California over mortgagesecurities that the bank sold in the runup to the financialcrisis.
The bank and the Justice Department began discussing a broaddeal that would resolve not only the inquiry into mortgage bondsit sold to investors between 2005 to 2007 that were backed bysubprime and other risky residential mortgages, but also similarlawsuits from the FHFA, the National Credit UnionAdministration, the state of New York and others.
The broader settlement is a product of a government workinggroup created nearly two years ago to investigate misconduct inthe residential mortgage-backed securities market thatcontributed to the financial crisis. Officials from the JusticeDepartment, the new York Attorney General and others help tolead the group.
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