NEW YORK (Reuters) - The U.S. Department of Justice has stepped up a probe in recent weeks into Bear Stearns mortgage dealings in the run-up to the financial crisis, adding to JPMorgan Chase & Co’s legal problems, according to three sources familiar with the situation.
JPMorgan bought failing Bear Stearns with government encouragement during the financial crisis in 2008, but then became embroiled in private lawsuits by mortgage bond insurers alleging that home loans underlying securities were rotten from the start.
The probe, news of which was first reported by Reuters in February, has picked up steam in recent weeks. Justice Department officials have taken sworn testimony from at least three people, including former Bear Stearns employees, about mortgage-backed securities, according to one of the sources.
A spokeswoman for the Justice Department declined to comment. A JPMorgan spokesman declined to comment.
The developments follow new mortgage-related investigations by the Eastern District of California. All are fresh obstacles for CEO Jamie Dimon who is striving to restore the bank’s reputation for controlling risks after losing more than $6.2 billion in 2012 on its so-called “London Whale” derivatives trades.
The U.S. Attorney for the Eastern District of California has been conducting criminal and civil investigations into the bank’s mortgage securities, the bank said on Wednesday.
In those investigations, government lawyers have already concluded that JPMorgan committed civil violations of securities laws in offering mortgage bonds in 2005 to 2007 that were backed by subprime and other residential mortgages.
A source familiar with the situation said on Thursday that the California probes involve mortgage bonds offered by JPMorgan itself, and not those by companies the largest U.S. bank bought during the crisis.
In the “London Whale” debacle, the bank is working to reach a settlement with the U.S. Securities and Exchange Commission by year-end, in which it will pay a penalty and admit faults, according to a person familiar with that matter.
More than five years after the onset of the financial crisis, and 17 months after President Barack Obama formed a task force of federal and state law enforcers to bring cases, the government is finally gaining some traction against alleged wrongdoing in housing finance.
In addition to the JPMorgan mortgage investigations, the Justice Department filed a civil lawsuit on Tuesday against Bank of America Corp over $850 million in mortgage securities.
“My office anticipates further action in the coming months,” New York Attorney General Eric Schneiderman, a co-chair of the mortgage-securities working group, said on Thursday.
The latest Justice Department probes of JPMorgan piggyback on previous cases by the New York attorney general and the U.S. Securities and Exchange Commission.
Schneiderman sued JPMorgan last October over alleged improper sales of pools of home loans by Bear Stearns in 2006 and 2007. That case is ongoing. In November, JPMorgan agreed to pay $296.9 million to settle an SEC complaint over improper mortgage securities sales.
JPMorgan has also disclosed that it faces probes and sanctions from multiple government entities over collections of consumer credit card debt, risk controls, anti-money laundering practices and systems for management of the capital it is required to have to absorb losses.
JPMorgan, the biggest bank in the U.S. by assets, may have little choice but to seek deals with the authorities, as continuing public anger over the financial crisis is encouraging regulators to impose tougher and costly safety requirements on banks.
The bank will likely see its high legal expenses continue for longer than many people expect, analyst Charles Peabody of Portales Partners said in a research note on Thursday.
Even though JPMorgan has settled some matters and booked $3 billion of legal expenses in the 12 months through June, the company has said that costs for lawsuits could still exceed its undisclosed litigation reserves by $6.8 billion, some $1.5 billion more than it had estimated the same time a year ago.
Wall Street analysts expect JPMorgan to earn more than $22 billion in net profit this year, so the bank can cover the costs. But the outlook for continuing legal expense will likely bring down those estimates, Peabody predicted.
Additional reporting by Peter Rudegeair and Carrick Mollenkamp in New York; Editing by Gary Hill, Paritosh Bansal and Edwina Gibbs