What Will It Cost JPMorgan to Make Nice With Regulators?

If U.S. Attorney General Eric Holder is a shark, then he’s circling JPMorgan (NYSE:JPM), and there’s blood in the water. Regulators have threatened to sue the bank, America’s largest by assets, claiming that it knowingly sold bad mortgage-backed securities to investors.
Regulators are seeking as much as $11 billion total from the bank for this and related alleged violations of securities laws such as a $6 billion penalty sought by the Federal Housing Finance Agency, according to the Financial Times.
Holder met with JPMorgan Chairman and CEO Jamie Dimon on Thursday to discuss the issue. According to a Financial Times report, people familiar with the situation said that the talks were constructive, but that no final deal emerged from the nearly two-hour meeting.
Dimon appears eager to make nice with regulators but also disagrees with regulators about how much responsibility his bank bears for the actions of Bear Stearns and Washington Mutual. The government encouraged JPMorgan to acquire both companies during the financial crisis, moves that ultimately helped minimize the damage that failing securities were doing to the markets at the time.
The government’s seemingly relentless onslaught of litigation against major financial institutions like JPMorgan is designed to try to teach the industry a lesson. At first blush, it appears to be working: Dimon has made it clear that rebuilding the bank’s reputation with regulators is one of his top priorities.
He was likely motivated to play nice in the wake of the London Whale fiasco, in which JPMorgan lost more than $6 billion. Dimon has described the ordeal as “the stupidest and most embarrassing situation I have ever been a part of.”
But JPMorgan isn’t the only bank the regulatory sharks are circling. Bank of America (NYSE:BAC) squared off against the government on Tuesday morning on the first day of a trial that is expected to last as long as four weeks. Prosecutors led by U.S. Attorney General for the Southern District of New York Preet Bharara have accused the bank of “massive fraud” by selling bad mortgages to Freddie Mac and Freddie Mae during the build-up to the financial crisis.
It’s important to clarify that while prosecutors have their crosshairs trained on Bank of America, this particular case has more to do with Countrywide Financial, once the country’s largest mortgage lender. Countrywide was purchased by Bank of America in 2008 as the housing market was collapsing, and the lender along with it.
In a complaint initially filed in October 2012, the plaintiffs explained their case against Bank of America: “In 2007, as loan default rates rose across the country and the GSEs reevaluated their loan purchase requirements, Countrywide rolled out a new ‘streamlined’ loan origination model it called the ‘Hustle.’” The Hustle program — or High Speed Swim Lane — is at the heart of the case against the mortgage lender.