Once again, news surrounding the Mortgage Backed Securities fiasco has resurfaced. This time, a deal surrounding the Federal Housing Finance Agency (FHFA) claims related to the home loans and MBS JPMorgan sold to Fannie Mae and Freddie Mac. This lawsuit first surfaced two years ago when the FHFA, who protects Fannie Mae and Freddie Mac, sued JPMorgan among other banks for issuing faulty mortgage bonds. The FHFA took this course of action in order to recover some of the losses taxpayers were forced to incur when the government stepped in to help the failing mortgage finance companies in 2008. During this time, the government lent Fannie Maw and Freddie Mac a total of $187.5 billion in federal aid, of which they used about $146 billion to pay in dividends. This repayment was seen as a good thing as it seemed to help out the taxpayers and those who lost out on these mortgages.
Anyways, the FHFA and JPMorgan stuck a deal this week in which JPMorgan agreed to pay $5.1billion to the FHFA for the claims of the bad MBS provided. $4 billion of the aforementioned total will be used to settle the lawsuit regarding the faulty mortgage bonds and the remaining $1.1 billion settles claims that the firm sold the companies defective loans that they packaged into their own securities. However, a key thing to note in this deal is that JPMorgan did not admit any fault or wrongdoing. This is important for JPMorgan because their reputation and stature is getting attacked with these allegations. Furthermore, JPMorgan reported its first ever quarterly loss under the leadership of Jaime Dimon after he assumed the role of CEO.
JPMorgan faces many other allegations, such as its hiring practices in Asia and its dealings with Bernard Madoff. This is a rough time for the bank and they seem to be handling it well. They were able to settle these large mortgage suits without direct admittance of fault, although the act of settling itself speaks volumes, and still maintain the title of the largest bank in the US. Furthermore, the somewhat forced adoption of Bear Sterns by JPMorgan from the US government could be used as leverage and has been used because these claims deal with executives who transferred in from Bear Sterns. JPMorgan is in a tough situation. It will be interesting to see the effects of this settlement on JPMorgan’s future dealings.
- Subeg Singh