JPMorgan Chase CEO Jamie Dimon went to Washington almost a month ago to see if U.S. Attorney General Eric Holder would settle a criminal probe of mortgage fraud at the bank if it paid more money to resolve related civil investigations.
Holders team, which included Deputy Attorney General James Cole and Associate Attorney General Tony West, said ending the investigation by the U.S. attorney in Sacramento would require the bank to plead guilty to something, according to a person familiar with the talks, which were held in a conference room that was Robert F. Kennedys office when he had Holders job.
Later, the department proposed the bank plead guilty to making false statements related to sales of toxic mortgage bonds. The bank proposed a nonprosecution agreement, which Holder rejected, the person said. The bank agreed to assist the continuing criminal probe. The negotiation typifies the harder line the Obama administration is taking in its second term.
Holder, 62, in an interview with Bloomberg News about the departments new aggressiveness on bank probes, said: It was clearly a priority for the president, it was a priority for me and for this Justice Department. One look at the magnitude of harm and the number of people suffering as a result of these acts that were looking into made sense to me that my personal involvement was needed.
Holder, a Columbia University law school graduate who has spent much of his career at the department, gave the interview just a few hours before he and Dimon agreed Oct. 18 to an outline of a $13 billion accord to resolve the civil investigations.
MASSIVE PENALTIES
Holders refusal to let JPMorgan, the biggest U.S. bank, escape criminal liability for its mortgage-bond sales, and the move to extract massive penalties for wrongdoing that led to the financial crisis, may go a long way toward appeasing critics of the Justice Department who have been urging charges against bankers since the collapse of Lehman Brothers Holdings Inc. in 2008.
Joe Evangelisti, a spokesman for the New York-based bank, declined to comment on the talks.
The effort began on marching orders from President Barack Obama, who promised in his 2012 State of the Union address to hold banks accountable for their role in helping trigger the deepest recession since the Great Depression. A mortgage task force of prosecutors and regulators set up to carry out the presidents mandate produced the record $13 billion deal, which requires a formal sign-off by both sides.
TAKING SHAPE
The first indications that the departments long criticized efforts were taking shape surfaced in three places. Bank of America Corp. was sued in federal court in Charlotte, North Carolina, on Aug. 6, accused of misleading investors about the quality of loans in $850 million in bond deals.
Two days later, JPMorgan disclosed that it was being civilly and criminally investigated by the U.S. attorney in Sacramento, the criminal probe Dimon and his general counsel, Stephen Cutler, were trying to end in the Sept. 26 talk with Holder, and a lawsuit against Clayton Holdings LLC, Wall Streets largest due diligence firm, was filed that month, producing a U.S. demand for a turnover of massive amounts of documents about financial clients.
At an Oct. 3 hearing in federal court in Hartford, Connecticut, three days into the government shutdown that halted government lawsuits nationwide, Assistant U.S. Attorney Edward Newman complained Clayton was trying to saw the legs off of the Justice Departments probe into mortgage bond sales by refusing to turn over e-mail and client reports covering a three-year period.
COOPERATIVE ARRANGEMENT
For Claytons lawyer Marc Rothenberg it was a sharp shift in tone from a more cooperative arrangement over six years during which prosecutors sought information from his client on a case-by-case basis. As he explained it to the judge in charge of the case, he was suddenly being told by the government: We want it all, and we want it now.
Rothenberg said 16 banks were on a list of targets the government gave his client in June. The department is focusing on about half of them, according to a person familiar with the matter. Rothenberg and the government refused to publicly identify the banks.
There will either be cases announced or resolutions announced, I just dont know which they will be, West, who oversees the group devoted to probing the sale of residential mortgage-backed securities, said in an interview at the Justice Departments headquarters last week.
TASK FORCE
West, who wouldnt speak specifically about any of the departments continuing probes, explained how the task force developed its plans to bring cases stemming from the financial crisis -- and what banks might expect in the future.
Youre seeing some of those results peek through the surface now, West said.
William Black, who served as deputy director of the Federal Savings and Loan Insurance Corp. during the S&L crisis of the 1980s, said the departments actions havent convinced him that bank executives will ever be charged.
So, the large story remains, Black said in an e-mail. No prosecutions under Bush and the first five years of Obama of the elite bank frauds that drove the crisis.
The demand for a record-setting settlement from JPMorgan has put Holder, the subject of continued attacks from Republicans in Congress since becoming attorney general in February 2009, on the offensive.
CONGRESSONAL BACKLASH
Holder, a former District of Columbia Superior Court judge and ex-U.S. attorney in Washington, sparked a Congressional backlash that defeated his plan to try Khalid Sheikh Mohammed, accused of planning the Sept. 11, 2001, terrorist attacks, in Manhattan.
He is being sued by a Republican-controlled House committee to enforce a subpoena for its inquiry into Operation Fast and Furious, a department probe that allowed illegal gun purchases in the U.S in an effort to link the weapons to Mexican gangs.
Holder, citing executive privilege, has refused to give lawmakers some material they wanted.
He has also come under fire from conservative groups for dropping the governments case in the Defense of Marriage Act.
He doesnt want to see his legacy be that of the attorney general who saw banks as too big to fail, John Coffee, a professor of law at Columbia University, said.
The RMBS group -- made up of several state and federal agencies -- was created in January 2012 to search for misconduct in the creation, packaging and sale of mortgage-backed securities. More than two dozen subpoenas were issued to banks and other industry players and West put out a public call for whistle-blowers and bank insiders to help.
Millions of documents poured in and specific matters were farmed out to about 10 U.S. attorney offices.
HIRING SPREE
The department, using its own funds and some from the Federal Housing Finance Agency inspector generals office, went on a hiring spree. Two dozen support staff, such as financial analysts and investigators, were brought on, along with 10 prosecutors and 85 contract attorneys, according to data provided by the department. An additional 15 contract attorneys were hired for the office of New York Attorney General Eric Schneiderman who is co-chairman of the RMBS group.
Federal resources, including 11 assistant U.S. attorneys, helped Schneiderman bring a lawsuit against JPMorgan over Bear Stearns mortgage bonds in October 2012, according to department data. Schneiderman, who said when the case was filed that it would be a template for future cases against issuers of mortgage-backed securities, said in a statement that the case is among those being negotiated in the departments deal.
CREDIT SUISSE
The group also had a hand in $417 million in settlements that the Securities and Exchange Commission reached with JPMorgan and Credit Suisse Group AG over RMBS sales a month later.
The probes picked up speed and a sense of urgency this spring as West brought in his counsel, Geoffrey Graber, to direct the effort, he said. Graber had just wrapped up getting the governments lawsuit against McGraw-Hill Cos. and its Standard & Poors unit filed in California, alleging the companies knowingly understated the credit risks of bonds and derivatives.
That case wasnt the product of the working group -- resulting from an investigation that lasted three years. It was, however, premised on the same law being used by the working group in its probes.
FIRREAs ROLE
The law, the Financial Institution Reform, Recovery and Enforcement Act of 1989, known as FIRREA, a relic of the savings-and-loan crisis of the 1980s, allows the government to sue an individual or group, rather than charge them with a crime, for fraud that affects a federally insured financial institution. FIRREA carries a 10-year statute of limitations, giving the government double the time to bring its case than allowed under other securities laws.
Other advantages of FIRREA include a lower burden of proof than what is needed to win a criminal case as well as prosecutor access to secret grand-jury evidence that may have been developed in the course of separate criminal probes.
The U.S. can extract hefty penalties as well. FIRREA allows penalties of more than $1 million for each fraudulent statement or act, and as much as $5 million for continuing violations of underlying criminal statutes.
Using bank and industry insiders, members of the group identified who the key players were, the relationships between different entities and patterns of conduct and similarities among the various probes, West said.
SAME PATTERN
Understanding how the RMBS process worked from insider perspective was very important, West said. Once you began to get information about how something worked you could then look at other cases you were doing and if you saw that same pattern it really helped you begin to unravel some complexities involved in those cases.
Earlier this year, Holder said he instructed the RMBS group to identify the most promising leads and direct personnel and funds to those matters. A set of possible cases were identified and deadlines for completing those matters were set. Prosecutors from less-promising cases were moved to those on the priority list.
It was all with the thought that we needed to really focus our attention, focus our efforts, so that we could get to the results that would have a deterrent effect, would hold people and institutions accountable and do it as quickly as we could, Holder said.
REGULAR MEETINGS
Holder held meetings in his conference room every two weeks with West, Graber and Michael Bresnick, who until August had been executive director of Obamas Financial Fraud Enforcement Task Force, and others. A printout would be given to Holder that included all the cases under review with the current status of each probe along with a column for comments, he said. Calls were made to the U.S. attorneys managing the probes.
Knowing youre going to be speaking to the attorney general tends to keep people on task and on focus, Holder said.
