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Last updated: November 15, 2013 10:46 pm
JPMorgan Chase agreed to pay $4.5bn to institutional investors including BlackRock and Goldman Sachs Asset Management to settle claims it mis-sold mortgage securities, dispersing one of the dark clouds hanging over the bank.
The deal helps JPMorgan put behind it a major piece of mortgage litigation related to the financial crisis, albeit at the cost of further billions of dollars. It comes as a separate broader deal with the US government over bad mortgages, which could see JPMorgan pay $13bn in total, is still being thrashed out.
A Texas-based law firm, Gibbs & Bruns, brokered the deal between JPMorgan and the investors. The Financial Times first reported last month that the bank, the largest in the US by assets, had reached a tentative deal with institutional investors.
That preliminary settlement was valued at about $6bn. The difference in the final deal is explained by the absence of securities sold by Washington Mutual, the bank acquired by JPMorgan during the crisis.
Resolving the dispute over that pool of securities has become more complicated by the separate negotiations between JPMorgan and the US government. The Federal Deposit Insurance Corporation and the bank are in a longstanding dispute over who should be responsible for losses on the securities.
But both sides decided to press ahead, aiming to resolve the remaining piece before the end of the year. “We’re very pleased,” said Kathy Patrick, a partner at Gibbs & Bruns. “It’s a testament to our clients’ tenacity.”
JPMorgan said it was “another important step” towards resolving its mortgage securities problems.
The bigger step is being held up as lawyers for the bank and the Department of Justice argue over the wording of a settlement that will see JPMorgan pay a record penalty over claims it packaged bad loans into securities that later plunged in value during the financial crisis, causing huge losses for private and government investors.
On Friday a New York court finished hearing from witnesses in a case that will decide whether a similar deal between institutional investors and Bank of America should proceed. A similar group of investors – and Ms Patrick’s law firm, which pioneered the legal mechanism used in the case and stands to earn tens of millions of dollars – agreed that deal with BofA, which would see the bank pay $8.5bn to resolve claims against it.
But that deal garnered objectors, led by AIG, the insurance group, which said the compensation was too low. JPMorgan’s deal could encounter similar resistance but its supporters argue the law is becoming clearer and the prospect of overturning it is slim.
In total, there are 21 investors who agreed the deal, ranging from Landesbank Baden-Wuerttemberg to Pimco. The law requires more than 25 per cent of a trust, which manages a pool of mortgage-backed securities, to push for the deal, a high bar that has proved difficult to meet.
Other investors who bought MBS from JPMorgan or Bear Stearns, which JPMorgan bought in 2008, are eligible. JPMorgan is reserved for the payment, it said, so it will not depress future profits.
Additional reporting by Stephen Foley in New York
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