JP Morgan ‘faces record $13bn fine’

US banking giant JP Morgan is set for a record $13bn (£8bn) fine to settle investigations into its mortgage-backed securities, US media reports say.

A tentative deal is believed to have been reached in talks with senior US justice department officials.

The sale of overvalued mortgage-backed securities was blamed for the near-collapse of the banking system in 2007.

Last month, JP Morgan was fined almost $1bn in a separate case over the “London Whale” trading debacle.

The scandal arose from disastrous trades by former bank employee Bruno Iksil, who made big bets on the financial markets.

Risky assets

The tentative deal to pay the $13bn fine to the justice department was reached during the talks on Friday, between JP Morgan lawyers with US Attorney General Eric Holder and his deputy Tony West, the Wall Street Journal said, citing officials familiar with the decision.

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Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
Mortgage-backed securities (MBS)
These are securities that pass through payments received on a large collection of mortgage debts. Banks repackage debts from a number of mortgages into MBS, which can be bought and traded by investors. By selling off their mortgages in the form of MBS, it frees the banks up to lend to more homeowners.

The New York Times also reported that the investment bank was nearing the agreement, although final details are still being discussed.

Neither the justice department nor the bank was available for comment.

If confirmed, it would be the biggest settlement of its kind ever paid by an American company.

The $13bn sum is said to include $9bn in fines and a further $4bn in relief for struggling homeowners.

In the run-up to the financial crisis, sophisticated financial products known as mortgage-backed securities were created by many investment banks.

These special bonds contained a mix of investments but at their heart were supposed to be risk-free home loans, the BBC’s business correspondent Joe Lynam reports.

What JP Morgan is alleged to have done was sell the mortgage-backed assets knowing full well that many of the home loans were in fact very risky.

The mortgage-backed assets are widely thought to have played a central role in the near collapse of the banking system when banks realised in 2007 that many of their assets were worth a fraction of their official book value.

The fine would settle all potential civil action that might be taken against the bank in future but does not mean that criminal cases against individuals are ruled out, our correspondent adds.

JP Morgan had initially aimed to persuade US justice department officials to drop the criminal investigation but the attorney general ruled that out, reports said.

In August, US government officials filed two lawsuits against Bank of America relating to mortgage-backed securities. Bank of America denied civil fraud in failing to disclose risks and misleading investors.

Legal woes

JP Morgan has found itself overwhelmed by mounting legal troubles lately.

Once the darling of Washington and Wall Street, it reported a rare quarterly earnings loss last week, mostly due to legal costs totalling $9.2bn.

The bank lost $380m during the quarter, compared with a profit of $5.7bn in the same period last year.

JP Morgan says it has set aside a fund of $23bn to deal with mounting legal costs.