Crisis negotiations at JPMorgan: Banking on a deal with the DOJ

Sometimes the goal in negotiation is to improve your fortunes. At other times, the best you can hope for is to lessen the fallout from past mistakes.

Take the case of JPMorgan Chase, which in late September was threatened with civil charges 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 case, 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.

An early impasse
Though JPMorgan appeared to weather the credit crisis better than most other large U.S. banks, by 2013 it was facing an avalanche of government investigations into potentially illegal activities. Most prominently, the bank stood accused of bundling subprime mortgage loans into securities and selling them to investors during the housing bubble without proper warning of the risks involved.

In July, Associate Attorney General Tony West met with JPMorgan executives at DOJ headquarters to outline an array of civil and criminal investigations being conducted in various jurisdictions nationwide. 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.

A new deal on the table
The Sacramento prosecutors told the bank to expect a civil lawsuit on September 24 and said that a criminal case was still on the table. As the deadline approached, 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 the 24th, 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.

Negotiations slowed amid the federal government shutdown. But in early October, Dimon moved talks forward with a series of calls to Holder. Meanwhile, to reassure investors of its financial health, JPMorgan disclosed that it had set aside $28 billion to cover legal expenses.

An agreement emerges
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. Dimon did.

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.

At this writing, the parties still needed to resolve critical issues, such as how much wrongdoing JPMorgan is willing to accept responsibility for. If the deal holds, it will include the largest settlement payment the DOJ has ever negotiated from a single corporation. The government reportedly plans to use the JPMorgan case as a template for investigations of other large banks accused of selling troubled mortgage securities.