RiskOperational RiskJP Morgan Seeks US$11bn Settlement of MBS Claims

JP Morgan Seeks US$11bn Settlement of MBS Claims

JPMorgan Chase is in talks with US government officials to settle federal and state issues related to the selling of mortgage-backed securities, according to reports. The total settlement figure proposed of US$11bn comprises US$7bn in cash and US$4bn for consumers.

Parties involved in the discussions include the US Department of Justice (DoJ), the Securities and Exchange Commission (SEC), the US Department of Housing and Urban Development (HUD) and the New York State attorney general.

JP Morgan, which recently
paid US and UK regulators a reported US$920m
to settle the so-called ‘London Whale’ episode involving trading losses incurred by rogue trader Bruno Iksil hopes to ease some of the pressure that regulators have been applying in recent months.

The largest US bank has disclosed more than a dozen probes globally in recent filings, including an investigation from the US DoJ in California that preliminarily concluded that JPMorgan violated securities laws in selling subprime mortgage bonds.

US DoJ lawyers from other areas of the country and state authorities have been investigating JPMorgan’s liability for mortgage securities sold by two other companies it acquired during the financial crisis, Bear Stearns and Washington Mutual.

“Now JP Morgan has paid a huge price for peace with the regulators, its next campaign will be inside the firm itself,” commented Andre Spicer, professor of organisational behaviour at Cass Business School, London. “To ensure this doesn’t happen again, senior executives need to fight against a creeping culture where bankers saw themselves as the customers they were creating value for. This led to extreme risk taking and deviant behaviour on a massive scale.

“To break with this self-serving culture, the bank has started to build better risk management and compliance systems, and exit the most dangerous parts of the market. But new risk management technology will only get you so far. To make the bank sustainable, a deeper culture of responsibility, integrity and trust must be built. This will face stiff opposition from many in the investment bank.

“Winning this cultural war will take patience and determination. It will spark cynicism. It will also come at the cost of some talent fleeing to less regulated sectors. But in the long term it will make the bank safer and win back public trust.”

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