JPMorgan's Mortgage Settlement May Reach $20 Billion

It just has not been JP Morgan's year.

The firm which in the early years after the Lehman collapse was happy basking in the shadow of Goldman and Lloyd Blankein, as the squid took the bulk of the public fury, is now getting the royal punching bag treatment and it appears that with every passing day Jamie Dimon's bank, the largest in the US, is hit with a new lawsuit, fine, or settlement. But while the most notorious breach of fiduciary duty in the recent past was the firm's infamous London Whale prop trading blunder, which resulted in an SEC settlement had the firm actually admit guilt to securities law violations, the actual damage to JPM was a manageable slap on the wrist amounting to a largely token $950 million.

Ironically, it may be the sins from JPM's pre-crisis legacy closet that come back to haunt it most dearly, and result in a fine/settlement that would make the London Whale damages seem like lunch money (expensed to the taxpayer of course).

As the NYT reports, "The nation’s largest bank is bracing for a lawsuit from federal prosecutors in California who suspect that the bank sold shoddy mortgage securities to investors in the run-up to the financial crisis, according to people briefed on the matter. The case, expected as soon as Tuesday, could foreshadow other actions stemming from the bank’s crisis-era mortgage business. Federal prosecutors in Philadelphia, the people briefed on the matter said, are also investigating JPMorgan’s sale of mortgage securities."

But while a mortgage-related lawsuit and/or a settlement was long in the making, and was well-known to most in the industry, it is the monetary aspect of the resolution that is slowing down the outcome. Because if the NYT is correct, not even taking credit for all its fake "earnings" in the form of a complete reserve release would save JPM:

Underscoring the breadth of the scrutiny, the people said, JPMorgan and the Department of Housing and Urban Development briefly discussed the possibility of striking a wide-ranging settlement to conclude many of the looming mortgage investigations from federal authorities and state attorneys general. But the housing agency floated a price tag of about $20 billion for the settlement, the people said, effectively derailing settlement talks with JPMorgan lawyers, who were stunned by the size of the proposed penalty and expected to pay a fraction of that sum.

That's right: $20 billion! That is more than the firm has reserved for all current and future litigation, is roughly how much net Income JPM would have in a good year, and most importantly, is more than the entire amount of loan loss reserves JPM has ($19.4 billion) on the books currently. Should this buffer be exhausted then JPM will be in a truly sticky predicament: it will actually have to make real, non-imaginary profits!

Should JPM not be able to negotiate this epic settlement away, which would likely be the largest in the history of finance, then the firm's stock plunge from 2012 will be a playful treat compared to what awaits Jamie Dimon, who will almost certainly lose his job if a settlement of such magnitude is formalized.