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Good journalism: “Everything you need to know about JPMorgan’s $13 billion settlement”

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Excellent summary and backgrounder on the MPMorgan settlement in an article by Neil Irwin at the Washington Post:

PMorgan Chase is nearing a $13 billion civil settlement with the Justice Department for its mortgage lending practices. So what’s going on here? We’re here to help.

What is JPMorgan Chase?

It’s the largest bank in the United States, with $2.4 trillion in assets. It is active in a wide variety of financial services businesses, including both what you might think of as ordinary consumer banking–taking deposits and offering car loans, mortgages, and credit cards–and more exotic Wall Street deal-making like helping large companies issue stocks or bonds. It has 255,000 employees, about the population of Orlando.

Its history dates back to 1799, with the Bank of the Manhattan Co., founded by Aaron Burr (the guy who killed America’s first treasury secretary in a duel), which helped finance the Erie Canal; that is one of more than 1,000 banks that have merged over the generations to become the colossus that is now JPMorgan Chase.

The most important of those predecessor firms is J.P. Morgan & Co., founded by the great Gilded Age financier in 1871, which played a key role financing the American rail system, the Brooklyn Bridge, and the Panama Canal. Morgan was a titan of American finance, helping guide the young republic through a series of financial crises at a time there was no central bank. Think Tim Geithner circa 2008, but with less hair and a groovy mustache.

J.P. Morgan merged with Chase Manhattan in 2000, leading to the current JPMorgan Chase. It is run by Jamie Dimon, who is arguably the most successful banker of his generation. Dimon also has better hair than J. Pierpont Morgan.

JPMorgan Chase CEO Jamie Dimon at the Justice Department, where he met with Attorney General Eric Holder last week. Excellent hair. (Gary Cameron/Reuters)

So what is this settlement about?

In the years before the 2008 crisis, large banks were in the business of “mortgage securitization.” They would take home loans made by retail banks and mortgage brokers all over the country, and sell them to others.

The government-sponsored mortgage finance companies Fannie Mae and Freddie Mac bought some of these mortgages. And the banks also packaged some of them into complex, privately issued  “residential mortgage backed securities” that were bought by investors around the globe.

But a lot of the loans that the banks sold were bad. Many were subprime, meaning to people with weak credit, small down payments, or both. Many more were “Alt-A”, a category of loan quality a little better than subprime but worse than prime loans. The companies buying the mortgages knew that they were investing in lower-quality credit risks. What they may not have known is just how bad lending standards had become, that many of the people taking out mortgage loans didn’t make as much money as they said they did, for example, or that there were other red flags to suggest that they wouldn’t be able to handle their mortgages.

As a result, the people who ended up owning the loans–both Fannie Mae and Freddie Mac, and the private investors who purchased mortgage backed securities–ended losing money as borrowers were unable to make their mortgage payments.

What did this have to do with the financial crisis? . . .

Continue reading.

Written by Leisureguy

21 October 2013 at 3:01 pm

Posted in Business, Government, Law

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