JPMorgan Chase & Co., the biggest U.S. bank, said it’s under federal criminal investigation for practices tied to sales of mortgage-backed bonds that the Justice Department has already concluded broke civil laws.
The department’s civil division told the bank in May of its preliminary finding after examining securities tied to subprime and Alt-A loans, which were sold to investors from 2005 through 2007, JPMorgan said yesterday. The office of U.S. Attorney Benjamin Wagner in Sacramento, Calif., is conducting civil and criminal inquiries, the bank said.
“It is unprecedented that the Department of Justice has seriously considered criminal indictment of a major bank and I question whether it truly is,” said John Coffee, a professor at Columbia Law School in New York. “You can often bring dual investigations, civil and criminal, in order to maximize pressure for a global civil resolution.”
Investigators are seeking to wrap up years-long probes of abuses that fueled the housing collapse and led global credit markets to freeze in 2008. This week, the Justice Department and Securities and Exchange Commission
“Whether they are waking up belatedly to the public’s need for retribution or looking at the expiration of the statute of limitations, they are reaching similar decisions about Bank of America and JPMorgan,” Coffee said in an interview.
The California probes are focused on loans and mortgage- backed securities put together by JPMorgan itself, not the ones acquired when the company bought Bear Stearns Cos. and Washington Mutual Inc.’s banking operations in 2008, according to a person briefed on the matter. The U.S. is investigating JPMorgan under the Financial Institutions Reform, Recovery and Enforcement Act, according to the person, who asked for anonymity because details of the inquiry aren’t public.
The 1989 law, known as FIRREA, allows the government to seek civil penalties for losses to federally insured financial firms. The Bank of America case cited the same statute.
Lauren Horwood, a spokeswoman for Wagner in Sacramento, declined to comment on the bank’s disclosures.
JPMorgan “continues to respond to other MBS-related regulatory inquiries,” the New York-based company wrote in a regulatory filing listing investigations. Federal and state authorities have sent subpoenas and requests for information about its origination and purchase of mortgages, and the packaging of debts into bonds, the bank said.
Investigators asked about the “treatment of early payment defaults, potential breaches of securitization representations and warranties, reserves and due diligence in connection with securitizations,” it said.
Joe Evangelisti, a company spokesman, declined to comment. Charlotte, N.C.-based B of A said buyers of its mortgage bonds were sophisticated investors with ample access to underlying data.
Federal prosecutors are reluctant to bring criminal charges against a large bank that’s tightly interconnected with other firms because it could endanger national or global economies, U.S. Attorney General Eric Holder told a Senate Judiciary Committee hearing in March.
“It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate,” he said.
JPMorgan, led by chief executive Jamie Dimon had $2.44 trillion in assets and $1.2 trillion in deposits at the end of June, the filing shows. The company also held derivative contracts with a notional value of $73.5 trillion.
“The Department of Justice is likely to be extremely cautious” in the criminal probe, Coffee said. “If they did anything, they might indict a subsidiary” or individual executives, he said.
The Justice Department also cited FIRREA while suing McGraw Hill Financial Inc.’s
The U.S. has said it may seek as much as $5 billion in penalties against S&P for losses to banks and credit unions that relied on its credit ratings to invest in instruments including mortgage-backed securities. The government alleges the ratings weren’t objective and independent as promised. S&P said the claims are meritless and that other raters placed the same grades on products.
Authorities accused BNY Mellon of misleading clients of its foreign-exchange services by concealing the way it priced trades. A federal judge in New York in April rejected the firm’s argument that it couldn’t be sued under the law.
JPMorgan said it’s also cooperating with the Justice Department’s four-year-old antitrust probe of the credit-default-swaps market.
The firm is among more than a dozen financial institutions, including Morgan Stanley and Citigroup Inc., accused by the European Commission last month of colluding to curb competition in credit derivatives. JPMorgan said yesterday that it’s cooperating with that inquiry, among others.
Separately, the bank received subpoenas and requests for information from the U.S. Attorney’s Office in Connecticut and the SEC regarding its discussions with other firms about mortgage-bond transactions, the filing shows. New York state bank regulators are examining JPMorgan’s handling of home loans for properties affected by superstorm Sandy last year.
JPMorgan sets aside reserves to help cover its legal bills, estimating that losses from lawsuits and investigations could exceed its legal reserves by as much as $6.8 billion, according to its regulatory filing. The bank, which doesn’t disclose the total size of its legal reserve, spent $678 million on litigation expenses in the second quarter, up from $323 million in the same period last year.
