Adapted from “Crisis Negotiations at JPMorgan: Banking on a Deal with the DOJ,” first published in the January 2014 issue of the Negotiation newsletter.
Sometimes the goal in negotiation is to improve your fortunes. But sometimes, the best you can hope for is to lessen the fallout from past mistakes.
Take the case of JPMorgan Chase, which in September was threatened with a lawsuit from the U.S. Department of Justice (DOJ) for its sales of troubled mortgage investments during the financial crisis. JPMorgan CEO Jamie Dimon’s hands-on negotiations to settle the potential charges and avoid a lawsuit, as recounted by Ben Protess and Jessica Silver-Greenberg in the New York Times, serve as a reminder of the burdens we must sometimes assume to head off a disaster.
In July 2013, Associate Attorney General Tony West met with JPMorgan executives at DOJ headquarters to outline an array of civil and criminal investigations of the bank. Along with its own behavior, the bank would be responsible for any charges stemming from improper sales of mortgage securities by two banks it had purchased during the financial crisis, Bear Stearns and Washington Mutual.
In the United States, companies commonly assume the legal liabilities of the firms they acquire unless they negotiate otherwise. JPMorgan apparently failed to negotiate more favorable terms in 2008.
During a meeting in August, JPMorgan asked the DOJ to persuade the U.S. attorney’s office in Sacramento to drop a criminal inquiry it had opened. The DOJ rejected JPMorgan’s $1 billion settlement offer.
The Sacramento prosecutors told the bank to expect a civil lawsuit and said that a criminal case was still on the table. Dimon was anxious to reach an agreement and head off formal legal charges, which would have been a costly and devastating blow to the bank’s reputation.
JPMorgan’s lawyers informed West that they were raising their offer to $3 billion, but U.S. Attorney General Eric Holder said that the amount was still far too low.
At 8 a.m. on September 24, four hours before the DOJ’s scheduled news conference to announce the charges against JPMorgan, Dimon called West and asked to meet in person. The news conference was scuttled.
At a meeting with the bank’s lawyers and Holder, West, and their team two days later, Dimon increased JPMorgan’s settlement offer to a hefty $11 billion. Holder insisted that JPMorgan would have to pay more to resolve the civil cases and also accept a criminal charge, the Times reports.
But in early October, Dimon moved talks forward with a series of calls to Holder. On October 18, JPMorgan backed down from its demand that the DOJ call off the criminal case after its lawyers advised Dimon that actual charges were unlikely.
“What will it take to get this done?” Dimon asked during a conference call with West, Holder, and others that night. Agree to pay $13 billion, Holder told him, and there would be no lawsuit.
The deal, officially announced on November 19, will include the largest settlement payment the DOJ has ever negotiated from a single corporation. More than $6 billion of the sum reportedly will compensate institutional investors that suffered huge losses from mortgage securities sold primarily by Washington Mutual and Bear Stearns. Another $4 billion will be paid to struggling homeowners; the remaining $3 billion will serve as a fine.
The JPMorgan negotiations suggest three lessons for professionals involved in crisis negotiations:
1. Envision future scenarios.
During acquisition negotiations in 2008, when it had leverage against the U.S. government, JPMorgan failed to negotiate for ironclad protection against potential liabilities at Bear Stearns and Washington Mutual.
2. Take calculated risks.
JPMorgan was able to concede on the issue of criminal charges after its lawyers concluded that the risk of such charges was low. The calculation hints at the value of making careful risk assessments in negotiation.
3. Signal serious intent.
By appointing himself lead negotiator, Dimon conveyed to the DOJ that he was committed to forging a deal. When a negotiation stalls, “sending in the big guns” can be an effective means of moving forward.