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JP Morgan and Chase Company (JPM) on Monday settled down a $13 billion legal issue with the Justice Department. This settlement resolves a number of legal affairs for America's largest bank. Apart from this, sources from the company also say that around $4 billion worth of aid to anxious homeowners which was holding up the deal was also finally completed on Monday.
The settlement, termed historic by many, ends a plethora of investigations and other lawsuits targeted at soured mortgage bonds which were issued before the financial crisis. This is the biggest ever combination of fines and damages that the U.S. government has ever extracted in a civil settlement.
The most difficult part of the settlement was the consumer-relief pact. Owing to the complexities in this segment of the settlement, the Justice Department sought the help of the Department of Housing and Urban Development for final negotiations. It took over a week for the negotiations to be made. In fact, Attorney General Eric Holder and the head- negotiator of the Justice Department Associate Attorney General Tony West held lengthy discussions with HUD secretary Shaun Donovan while putting finishing touches on the terms. The largest bank of U.S., JPMorgan agreed to pay a minimum of $1.5 billion and as much as $1.7 billion to write down the company held loans in which the borrowers owe more than the worth of the property.
In addition to this, about $500 million would be invested in forbearance which involves the restructuring of certain mortgages in order to reduce monthly payments. The remaining $2 billion would be directed toward a number of different measures which include:
New mortgage obligations for low and moderate income borrowers. Absorbing the left over principal owed on properties that have been vacated but not yet foreclosed upon. The agreement including a $4 billion deal with the ! Federal Housing Finance Agency shadows the $4.5 billion from BP PLC for its Deep water Horizon mishap in the Gulf of Mexico as also the $13 billion paid by GlaxoSmithKline PLC after it was caught off-guard on the charges of illegally marketing drugs in the U.S.
The verdict also orders a separate criminal probe of the bank over mortgages to be initiated. A few government officials of the Justice Department say they have evidences against some workers of the bank relating to criminal wrongdoings. The bank officials, however, completely negated this.
Billions of dollars in residential mortgage backed securities are at stake in the JPMorgan settlement. The mortgage bond offerings were weaker than they had been projected. This, the government officials find a reason enough to charge the bank as it clearly dupes the customers. This settlement is not all bad for the company. This is because the agreement gives them a chance to put behind a huge number of legal issues.
The Justice Department has also arranged for an independent monitor to oversee the $4 billion concerned with consumer relief to ensure that the process is completed by the end - 2016. The company has agreed not to pursue the FDIC receiver, not even for a single portion of the $13 billion deal. This includes the $4 billion settlement with the Federal Housing Finance Agency. The FHFA though, when announcing the settlement last month did not bar JPMorgan to purchase FDIC receivership. This was done as a punishment by the Justice Department. The stocks of JPMorgan are performing average. With many legal issues now put behind, there may be some incentive for the investors in the company's stocks. However, as of now, nothing can be surely said.
What Worked in the Stock Market for Long-Term Investors? Extensive research has found that the companies with predictable revenues and earnings outperform the market average; they also suffer lower probability of loss. As a matter of fact, this kind of companies are exactly what Warren Buffett wants to buy and hold forever. Please read the research about what worked in the stock market:
Part I: What worked in the market from 1998-2008? Part I: Predictability Rank
Part II: Role of Valuations
Part III: Intrinsic Value, Discounted Cash Flow and Margin of Safety
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