JP Morgan has agreed on a $13 billion settlement with the US Justice Department over the mis-selling of mortgage securities - the biggest settlement of its type in US financial history.

The blame game

Authorities say that the sort of conduct JP Morgan has admitted is at the core of what caused the housing bubble and subsequent crash – lenders providing risky mortgages and selling them to investors who thought they were not running undue risks. The Justice Department said JPMorgan accepted it had regularly and knowingly sold mortgages to investors that should have never been sold.

The responsibility of banks like JP Morgan for the crisis is not always clear when set against the actions of politicians and regulators. There remain concerns that the actions of state-backed US housing agencies, such as Freddie Mac and Fannie Mae, for example, helped fuel the crisis by how they – encouraged by changes enacted by legislators – stood behind many of the mortgages sold to the US public. A period of ultra-low interest rates set by the US Federal Reserve is also cited by some commentators as a driving force, as are actions of entities such as rating agencies and the possibly perverse consequences of Basel bank capital rules, accounting standards and risk models, and the “shadow banking” system of financial securitisation.

Laws

"As a result of this settlement and the proposed settlement of representation and warranty claims announced on Friday, November 15, the company has resolved a significant portion of the RMBS-related civil litigation claims being defended by the company, and substantially all of the claims brought by federally insured and federally controlled entities. JP Morgan Chase continues to cooperate with the ongoing criminal investigation by the Department of Justice," the bank said in a statement late yesterday.

The blue-blooded bank had expected to be hit with a large settlement deal and had provisioned for this in recent results. Recent months have seen a number of blows for the bank. In September, UK and US regulators fined JP Morgan a total of $920 million for “serious failings” relating to trades carried out by the firm’s Chief Investment Office and disclosed last year.

Until these issues arose, JP Morgan had been seen as one of the few US banks to have emerged from the 2008 financial crisis with its status enhanced. The fine adds to those imposed on other firms for issues such as rigging interbank interest rates, for example.

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