The JPMorgan Chase & Co bank headquarters building in New York.LUCAS JACKSON/Reuters
The most ominous word U.S. bankers have heard this week is "template."
As in, the giant, record-shattering $13-billion (U.S.) settlement between JPMorgan Chase & Co. and the government will serve as a model for future agreements with financial institutions.
"There are a few banks that I've been talking to yesterday and today," said Eric Schneiderman, the Attorney-General of New York, on Wednesday, according to Capital, a local political news website. "Each institution is different, but we'll be able to build off of this template."
A number of U.S. banks stand to pay hefty sums for their roles in feeding the mortgage machine that helped fuel the financial crisis. Bank of America Corp. is already facing civil charges from the government related to its sales of mortgage-backed bonds; it warned in a recent filing that U.S. authorities are likely to launch further legal actions stemming from such deals.
Other banks reportedly under investigation for their sales of mortgage-backed bonds include Citigroup Inc., Wells Fargo & Co. and Credit Suisse Group AG. Spokesmen for all three banks declined to comment on the matter.
The new push to crack down on banks comes from a working group deep within the U.S. Justice Department. Formed in 2012, it is part of a broader task force aimed at ferreting out financial fraud, but its mandate is to focus on residential mortgage-backed securities. Such investments were the poster child for the excesses of the housing boom: Packed with subprime mortgages, they were sliced and diced and sold to institutional investors, often carrying high-quality credit ratings.
Judging by the JPMorgan settlement, prosecutors are zeroing in on discrepancies between the types of loans bundled into such bonds and what investors were told they were buying. JPMorgan admitted it misrepresented the quality of the loans in such securities; in one case, a bank employee wrote a letter warning that the mortgages were of such poor quality they should not be bundled and sold, but the bank proceeded with the transaction.
The impetus for such cases is coming from the very top of the Justice Department. Since earlier this year, U.S. Attorney-General Eric Holder has regularly attended meetings to receive updates on the progress of these matters, according to Michael Bresnick, a former federal prosecutor who helped oversee the effort. "When the people involved are answering directly to the boss, it sharpens the focus," he said.