Who gets JPMorgan's $13 billion fine?

The US and its largest bank have tentatively reached a record settlement over shady mortgages. Where the money goes may surprise you.

By The Week Oct 21, 2013 11:33AM

One of the big populist knocks against the Obama administration is that five years after Wall Street banks helped tank the economy by wildly speculating in the housing market, the banks have only received slaps on the wrist and no bank executives are in jail.

That latter part may still be true, but the former isn't. America's largest bank, JPMorgan Chase (JPM), has just agreed to pay $13 billion to resolve a host of issues related to sketchy mortgage-backed securities.

The tentative deal, which might still be scuttled over the bank's reluctance to admit to wrongdoing, is by far the largest single settlement from the 2008 financial crisis, and the biggest ever settlement between the U.S. government and one company. It is also a huge sum of money. (For context: $13 billion is a little more than half of JPMorgan's $23.1 billion in profits from last year).

According to an in-depth history of the settlement from The New York Times' Ben Protess and Jessica Silver-Greenberg, talks on a deal started in July, after the U.S. attorney in Sacramento outlined his office's case against JPMorgan over its own packaging and sales of mortgage-backed securities.

Over the next month, other cases were drawn in -- the Justice Department, federal prosecutors in Pennsylvania, New York Attorney General Eric Schneiderman, and the Federal Housing Finance Agency all had separate investigations or lawsuits targeting mortgage securities sold by Bear Stearns and Washington Mutual, both purchased by JPMorgan during the financial crisis. JPMorgan wanted to settle all the cases together, and gradually raised its settlement offer from $1 billion to $11 billion in late September.

On Oct. 18, after five calls between JPMorgan CEO Jamie Dimon and Attorney General Eric Holder, Dimon reportedly asked, "What will it take to get this done?" Holder said $13 billion, and no agreement to drop separate criminal charges against the bank. Dimon reportedly said alright, and the outline of settlement was in place.

Not everyone thinks this is a great deal for JPMorgan, especially since -- at least as Dimon tells it -- the bank agreed to scoop up Bear Stearns and Washington Mutual for bargain-basement prices as a favor to the U.S. government.

But JPMorgan obviously thinks it a fair price to get this heap of uncertainty off its plate. The bank has set aside $28 billion since 2010 to cover legal expenses, and drawn down $8 billion before this settlement.

But assuming the deal goes through, who gets this $13 billion pot of gold?

The Federal Housing Finance Agency: $4 billion

The government agency that oversees Fannie Mae and Freddie Mac will get $4 billion of the $13 billion settlement. That looks pretty good until you consider it bought $33 billion worth of lousy mortgage-backed securities from JPMorgan, Washington Mutual, and Bear Stearns between 2005 and 2007 -- so, in effect, the FHFA is getting back 12 cents on every dollar it invested.

As Bloomberg's Ryan Chilcote notes, 12 cents to the dollar is about the same as the government agreed to in a settlement with Bank of America, making a possible template for future government settlements.

Homeowners: $4 billion

In a Sept. 26 face-to-face meeting between Holder, Dimon, and their deputies and lawyers, both sides agreed that $4 billion of the settlement would go toward homeowners affected by the bonds. There aren't great details on how this part of the settlement will work, though reduced mortgage balances are said to be part of the bargain.

JPMorgan Chase CEO Jamie Dimon in June 2012 (© J. Scott Applewhite/AP Photo)"How the consumer relief and penalties get dispersed and distributed is largely up to the government, and those details are still unclear," say Devlin Barrett and Dan Fitzpatrick in The Wall Street Journal.

Because the details are so fuzzy, says Bloomberg View's Jonathan Weil, "this could take the form of coupons, discounts, or other soft benefits, which might not cost JPMorgan anywhere near $4 billion in the end." If it turns out that the settlement "lets JPMorgan finance breaks for homeowners with other people's money rather than its own," Weil says, "that isn't much punishment."

DOJ, New York, and investors: $5 billion

The remaining $5 billion will be divided between the Justice Department and New York's attorney general's office. In his office's lawsuit, Schneiderman said that investors had lost $22.5 billion from $87 billion in Bear Stearns mortgage-backed securities. Presumably, some of the New York State portion of the fines will be returned to investors.

As for the federal portion, "the government will no doubt present the record settlement as a major victory," says Francesco Guerrera at The Wall Street Journal. But the deal is "unlikely to silence both those who accuse the Feds of over-reaching in punishing J.P. Morgan and those who claim it didn’t go far enough in cracking down on pre-crisis excesses by banks." There is a way, though, to view the deal as "'win-win,' to use a hackneyed (and often wrong) Wall Street expression," Guerrera adds:

It seems likely that James Dimon... will remain at the helm of the largest U.S. bank by assets.... [And] Holder, the U.S. attorney general, should receive some credit for this result. No matter how aggressively the government pursued JPMorgan over the past few months, it never appeared to be asking for Mr. Dimon's head. Extracting a record settlement without destabilizing a key plank in the nation's financial infrastructure has to be a good result for the government. [Wall Street Journal]

The long and short of this unverified settlement is that "there is still much we don't know," says Bloomberg View's Weil. JPMorgan is getting some peace from the government, and the Justice Department is showing it is "capable of holding a large bank accountable for violations of the law." The most likely final tally will show that neither side "won a total victory."

But there is one near-certain victim, says BuzzFeed's Matthew Zeitlin: So long to "Dimon's once-sterling reputation as the most savvy, responsible, and profitable bank manager."

More from TheWeek.com

Oct 21, 2013 12:23PM
The US Government is suing and screwing anybody and everybody it can to cover up the fact that the Administrative, Legislative and Judicial branches of the US government are the real culprits in the recent financial crisis. The banks and mortgage originators and Wall Street took great advantage of the situation that our lame politicians created to get votes. Everybody including home owners were happy as pigs in crap until it hit the fan. It's quite amusing that the real innocents bystanders like every depositor and saver are the ones that are actually paying the bills for all these crooks and liars. How much interest have we received on our deposits in the last 5 years while we pay the fools in Washington to convince us of whose fault it was? Reduced mortgage balances for those that can't pay for what they bought?  Another round of socialism rewarding bad behavior!
Oct 21, 2013 12:46PM

So what happens when a big institution gets "slapped" with a major fine?  Where does the money come from to pay that fine?

How does that help the small people like me when my small holding, or my 401K absorbs the impact of JPMorgan's "slap"? The investors are the ones who pay for the bad decisions of the management.

Oct 21, 2013 12:58PM
Time to start doing some serious investigations into our leadership. Right wrong or indifferent, what JP Morgan is being accused of is peanuts compared to the scandals, cover-ups and gorilla tactics of late.
Oct 21, 2013 12:51PM
The real culprits were those whiz kids that repackaged those "toxic assets" and help peddle them globally.  Who were they?  Were they punished?
Oct 21, 2013 12:40PM
JP is getting screwed over by the same government that threatened to sue if they didn't loosen their standards.
Oct 21, 2013 1:04PM
Is it fair to blame and tarnish the good names of those who helped the US Government in its time of need?  Bank of America, JP Morgan Chase, Wells Fargo all came to cooperate with the government and bought those failed banks- Wachovia, Countrywide, Bear Stearns, Washington Mutual, etc.. at the government's request!  Should someone in the government also be held culpable for what happened?
Oct 21, 2013 12:55PM
Let's hear of some real person name(s) and hear what charges were filed against them!  Those who repackaged subprime mortgages, gave them AAA investment grade status and helped tank the economy!
Oct 21, 2013 1:27PM
"Presumably, some of the  fines will be returned to investors"  What are you smoking?  None of the money collected since Grubman and Salomon Smith Barney started paying indulgences in 2003 has any of the money been returned to investors.  In fact, most of the DOJ actions are simply shakedowns.  The really sad part of these settlements is that they totally prohibit any victims from ever legally receiving compensation.
Oct 21, 2013 1:17PM
Like they will tell the REAL FACTS behind all this........................GO FIGURE!!!!!!!!!!!
Oct 21, 2013 2:57PM
Big Government is BIG Business and when the government is not able to suck the middle class dry anymore it will turn its attention to the Big Boys to get the money they need to keep this **** going!When will American People wake up and get rid of all long-term Politicians!They have ran this Country into the groundRepublicns and Democrats! At a time when America should be prospering we are failing!There is only one reason for this!Government...Lack of Leadership!!Look at what they just did to the American people with no remorse!!Wake Up America and fire them all!!!
Oct 21, 2013 12:05PM

The Federal Government needs that money to pay the FURLOUGHED FEDERAL WORKERS who received a nice PAID VACATION !!    Keep messing with the Big Banks, and you will see a Recession three times worse than the last one !!   Leave the Banks alone, Eric Holder !!  You are the one who should be fined $ 13 Billion  and then FIRED !!

Oct 21, 2013 2:56PM

I wish the banks that purchased the other failed banks in 2008 would have just refused to purchase them.  Obama required that the banks purchase them or they would have been shut down.  Those banks should have been allowed to go out of business and let the depression come.  

The President of Bank of America was threatened in the middle of the night if he didn't purchase the worst offender of the lot.  That bank President never got jail time. Why is Obama raiding the American Banking industry? 

Oct 21, 2013 1:13PM
Why do we let these companies settle with a fine? Why not bring them to court for a trial? Oh wait....I think I know. It's called "discloser". All kinds of embarrassing things like money and stock options and lobbying fees and just plain greed would be on parade for all to see. Come on tea party, get behind this!
Oct 21, 2013 12:45PM
VINEYARD60:You`re right.Nobody went to jail over the housing scandal a few years ago.
Oct 21, 2013 3:59PM
Who will get it ?   Obama's Chicago crime family, Hillary Clinton and her white collar criminal friends.
Oct 21, 2013 4:38PM
JPM got screwed in this deal.  They were not part of the problem with bad mortgages.  That is why in the middle of the night they were asked or told they had to acquire WAMU with all its bad toxic assets.  They could have said FU and made the FED hold all those assets.  Then what?  Holder would have to sue Bernanke?  Right.
Oct 21, 2013 11:53AM
Jamie Dimon called the Iron Man by investors ! To Big To JAIL = To Big To Fail = The Criminal Banking Cartel continues to Rape, Pillage and Plunder the American People ! Now there is JUSTICE you can count on !
Oct 21, 2013 3:27PM
Mark Levin   The Liberty Amendments  !  RESTORING THE AMERICAN REPUBLIC !
Oct 21, 2013 3:05PM
For all investors who lost....should have bet against the rage at the time instead of going with the flow.  
History has a way of repeating itself.  ie: do ya think another farm crisis may be brewing?   keep a sharp eye...
learn from your mistakes..  
Oct 21, 2013 3:09PM

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