Jamie Dimon’s $13 Billion Secret

Jamie Dimon’s $13 Billion Secret

The inside story of JPMorgan Chase’s landmark mortgage settlement


In the end, the abject fear of Ben Wagner got Jamie Dimon to cave.

For much of 2013, Dimon, the chairman and chief executive of the formidable JPMorgan Chase & Company, was telling anyone who would listen that it was unfair and unjust for federal and state prosecutors to blame him and his bank for the manufacture and sale of mortgage-backed securities that occurred at Bear Stearns & Company and at Washington Mutual in the years leading up to the financial crisis. When JPMorgan Chase bought those two failing firms in 2008, Dimon argued, he was just doing what Ben Bernanke, Hank Paulson and Timothy Geithner had asked him to do. Why should his bank be held financially accountable for the bad behavior at Bear and WaMu?

It was a clever argument—and wrong. Dimon’s relentless effort to spin his patriotic story soon collided with the fact that Wagner, the US Attorney for the Eastern District of California, had uncovered evidence that JPMorgan itself was guilty of many of the same greedy and irresponsible behaviors. Piles of subpoenaed documents and e-mails revealed that JPMorgan bankers and traders had underwritten billions of dollars’ worth of questionable mortgage-backed securities that Dimon had been telling everyone had originated at Bear Stearns and WaMu. Worse, the bad behavior had occurred on Dimon’s watch.

The likelihood that the Justice Department would file Wagner’s civil complaint last fall—exposing publicly for the first time the litany of wrongdoing at JPMorgan and threatening to push it off the perch that Dimon had so artfully constructed for it over the years—ultimately brought Dimon to the table. On September 26, just weeks after the Justice Department shared a draft copy of Wagner’s complaint with Dimon, the two sides arranged for a summit meeting between Dimon and Attorney General Eric Holder. By mid-November, the bank had agreed to pay $13 billion in a comprehensive settlement of mortgage-related securities claims with various branches of the federal government and a group of states, led by the attorneys general of New York, California, Illinois, Massachusetts and Delaware.

It was the largest financial settlement of all time, and it kept Wagner’s complaint away from the prying eyes of the public. One thing is clear: Dimon’s claim that his own bankers and traders had done nothing wrong in the years leading up to the financial crisis wasn’t true. “The investigators and the lawyers were uncovering very viable evidence,” explains Associate Attorney General Tony West, who headed up the settlement negotiations on behalf of the Justice Department. “I think there was recognition that we had enough evidence there that would support the complaint and would support a robust lawsuit.”

* * *

Although Wagner’s complaint remains unfiled—and, so far, unobtainable—tantalizing hints of what it contains are available in a sanitized “statement of facts” that was a required component of the settlement. Unlike the complaint, the statement of facts doesn’t include names and offers few specifics, but there is no mistaking the wrongdoing. Among the documents Wagner uncovered was one in which an unnamed JPMorgan employee, who had been involved in purchasing pools of mortgages from third parties, warned two senior executives that “due to their poor quality, the loans should not be purchased and should not be securitized.” She expressed her concerns in a letter to a managing director at the bank, who shared it with other managing directors. “JPMorgan nonetheless securitized many of the loans. None of this was disclosed to investors,” Dimon conceded in the settlement agreement. [A disclosure of my own: after JPMorgan Chase fired me as a managing director in January 2004, I brought—and lost—a wrongful-dismissal arbitration against the bank. Separately, I remain in litigation with the bank as the result of a soured investment I made in 1999.]

In another instance, Wagner found that JPMorgan’s bankers had decided to eliminate a bunch of low-quality “stated income” loans—mortgages that had been granted without documented proof of the borrower’s income—from a pool of mortgages they were going to buy and securitize. When the originator of the mortgages objected to JPMorgan’s decision to remove these loans from the pool, a group of JPMorgan managing directors—including bankers, traders and salesmen—met with the originator and decided to buy two of the loan pools anyway, including those with the squirrelly mortgages. JPMorgan then proceeded to bundle “hundreds of millions of dollars of loans from those pools into one security.” Wagner found that between the start of 2006 and the middle of 2007—when the mortgage securitization frenzy was at its peak—JPMorgan packaged and sold securities containing thousands of mortgages that were rated by a third-party evaluator to be of extremely low quality, meeting few, if any, of the bank’s underwriting standards.

“Nobody would stand up and say Chase qua Chase—just Chase alone—didn’t do things wrong,” explains one person familiar with the facts. “There clearly is some liability.” Reflecting on the details contained in Wagner’s complaint that were left out of the statement of facts, West says that the statement “may not have all the bells and whistles that you would have in a complaint, but I feel confident that we were able to craft a statement of facts which lays out the concept that this thing was illegal and created liability. So from that standpoint, I think the public knows that JPMorgan engaged in activity that we considered to be fraud.”

The magnitude of the settlement, and the likelihood that it would create a template for other settlements with the big Wall Street firms, had government officials crowing. “Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Holder said at the time the settlement was announced. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior.”

Dimon was more circumspect. In a conference call the day the settlement was announced, he mostly kept quiet while Marianne Lake, the firm’s CFO, led financial analysts through the details, including how $7 billion of the $13 billion fine would be tax-deductible. Occasionally, Dimon interjected a clarifying comment. At one point Mike Mayo, a longtime Wall Street research analyst, asked Dimon the question on everybody’s mind, especially in light of Dimon’s aggressive efforts to shape the narrative: “How is it that JPMorgan got front and center with this issue? That it’s the Department of Justice working out an agreement with JPMorgan when JPMorgan performed so well during the crisis, yet here’s the one bank that’s paying a $13 billion fine?”

Without missing a beat, Dimon replied: “Mike, you’ve got to ask them, OK?” But there’s no question the pugilistic Dimon was plenty peeved. At the Microsoft CEO Summit in May, he reportedly told a crowd of executives that he “had to control his rage” about the settlement.

This, then, is the story of what happens when a hubristic CEO—often described as the reigning king of Wall Street—is confronted by a narrative he thinks he can control but ultimately cannot. It’s the tale of Jamie Dimon’s agenda and how it got derailed. But it is also the story of how the Justice Department has decided to handle the outrageous behavior of all the big Wall Street banks in the years leading up to the financial crisis. Unfortunately, it shows just how far the government is willing to go to avoid naming names, as well as to keep especially revelatory evidence of wrongdoing out of the hands of the American people. (Somehow, this is the new normal.)

Needless to say, there are many people eager to claim a large dollop of credit for bringing Dimon and JPMorgan to heel, and nary a soul at the bank willing to explain how or why it happened in the first place. Indeed, Dimon declined to be interviewed for this account, and the firm refused to allow anyone else at JPMorgan to comment. Why bother answering questions when your board responds to the $13 billion settlement by giving you a raise in compensation—to $20 million—for getting it done?

* * *


In his public comments the day the settlement was announced, New York State Attorney General Eric Schneiderman, co-chair of the task force that President Obama created to investigate and prosecute wrongdoing in the mortgage-backed securities market, said, “Since my first day in office, I have insisted that there must be accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy.” He likes to think he made a good start on that promise by collecting some $613 million of the JPMorgan settlement for New York.

Soon after taking office in January 2011, Schneiderman—a former state legislator from Manhattan’s Upper West Side (and the first state legislator since 1918 to be elected New York attorney general)—“cross-examined” the junior attorney in his office who had been working with other state attorneys general on what became known as the National Mortgage Settlement. In that deal, announced in February 2012, five of the nation’s largest banks agreed to pay $25 billion to settle claims related to home foreclosures in the aftermath of the financial crisis. The litigation arose out of the so-called “robo-signing” scandal, in which banks foreclosed on homes even though they no longer had the original mortgage documentation. (As part of the settlement, JPMorgan paid $1.21 billion to the federal and state governments and provided an additional $4.21 billion in various forms of mortgage relief to homeowners. The country’s five largest mortgage servicers—JPMorgan among them—also admitted they “routinely” signed foreclosure documents “without really knowing whether the facts they contained were correct.”)

Schneiderman’s staffer explained that no documents had been subpoenaed and no witnesses deposed related to the underwriting of mortgage-backed securities. The behavior of the bankers leading up to the financial crisis didn’t seem to be on anyone’s agenda. Schneiderman was furious. He couldn’t understand what was going on. “At first I thought, ‘Maybe there’s some cabal, like Treasury and the OCC [Office of the Comptroller of the Currency] and these pro-bank people, stopping the aggressive Justice Department folks,’” he recalls. One senator came to see him and warned him that people in Washington were “trying to rewrite history” about the causes of the financial crisis. There didn’t seem to be a conspiracy to thwart the prosecution of Wall Street bankers, the senator explained, just timidity and indifference.

In March 2011, Schneiderman went to Washington and met with Iowa Attorney General Tom Miller, who was heading up negotiations with the banks on the robo-signing settlement. Schneiderman says he asked Miller if anyone was looking into pre-crash wrongdoing. “My conversation with him indicated to me that no one had investigated,” he says. “No one was going to investigate.” (Apparently unbeknownst to Schneiderman, “there were definitely existing DOJ investigations throughout 2011,” West says. But it makes sense that Schneiderman never knew about them because the Justice Department kept that information close to the vest.)

Schneiderman says he and Miller also spoke about the status of the legal release from additional liability that the banks wanted as part of the settlement. Scheiderman wasn’t surprised to hear that the banks wanted to be released from liability regarding the underwriting of mortgage-backed securities prior to the financial crisis, but he was horrified to learn that Miller and the other attorneys general were prepared to give it to them. After speaking with Miller, Schneiderman decided that he would not sign a general release as part of the settlement. “He didn’t like it,” Schneiderman recalls of Miller’s reaction.

Miller disputes Schneiderman’s account. There was never the slightest chance that the banks would be released from any claims regarding their manufacture and sale of mortgage-backed securities, he says. “We had certain goals in mind concerning robo-signing, principal reduction, monetary relief, monitors—and we achieved all those goals, and we were never, in a thousand years, going to give them a relief on securities.” Another official close to the National Mortgage Settlement negotiations adds, “There is this allegation that has persisted to this day that we were going to give away the farm, that we were going to release everything, and it was only because of Eric Schneiderman [that we didn’t]; where he stood firm, and he interceded, and he said, ‘You can’t do that,’ and his bravery stopped that from happening. Totally, 100 percent false.”

* * *

Once Schneiderman returned to New York, he decided that his office would conduct its own investigation into the Wall Street banks’ wrongdoing in the years leading up to the financial crisis. Joseph R. Biden III, the Delaware attorney general and son of the vice president, heard about Schneiderman’s controversial decision not to sign on to the mortgage settlement and thought he was doing the right thing. The two agreed to work together.

“I informed myself quickly about how bad this was,” Schneiderman says. “It was even worse than I had realized, because it was so out in the open. It was like a bank robbery without masks or gloves. There had been bad behavior. People knew it was bad behavior. It wasn’t too hard to understand. It was unbelievable to me, actually, and I had a hard time even accepting the fact that there weren’t investigations going on, because how could you not investigate this?”

When New York Times business columnist Gretchen Morgenson wrote about the Schneiderman-Biden partnership in June 2011, she reported that subpoenas had been sent to Deutsche Bank and Bank of New York Mellon. After the column appeared, Schneiderman called Biden and asked why the banks weren’t responding. Biden’s answer shocked him further. Miller, he explained, had assured their colleagues in Washington that Schneiderman would eventually agree to the settlement. (Biden declined a request to be interviewed.)

Schneiderman moved quickly to clarify that he had no intention of signing the National Mortgage Settlement as it then stood. He went to see Thomas Perrelli, who’d preceded Tony West at the Justice Department. (Perrelli, now at the law firm Jenner & Block, did not return a phone call seeking a comment.) He went to the White House. He went to see Housing and Urban Development Secretary Shaun Donovan (who now directs the Office of Management and Budget). At each stop, Schneiderman says, he was told in no uncertain terms that he had to sign the deal. At times the conversations, even among political allies, became quite heated.

Schneiderman’s comments to the media further angered his colleagues. He told a Rochester, New York, newspaper that he was “stunned” to learn that no documents had been subpoenaed or depositions taken regarding the underwriting of mortgage-backed securities before the financial crisis, and that he would oppose “a quick, cheap settlement.” He said the attorneys general negotiating the settlement “had no leverage.” He said he would not give the banks a “full release.”

* * *

As summer turned into fall, the political heat on Schneiderman kept ratcheting up. Miller decided that the best person to calm Schneiderman down was former New York Attorney General Eliot Spitzer. After speaking with Schneiderman, however, Spitzer concluded that he was on to something and should hang tough. “That was a remarkable moment,” Schneiderman says.

In an interview, Spitzer acknowledged that he spoke with Schneiderman at Miller’s request but declined to elaborate. Miller says he asked Spitzer to see if he could “bridge” the differences between the two men. “That obviously didn’t work,” he adds.

As angry as government officials were at Schneiderman’s renegade behavior, they also knew that they needed him inside the tent to get a deal done. In early November 2011, Schneiderman received an unexpected call from Donovan, who proposed that they work together on a joint investigation into the pre-crash conduct of the banks. The two spent some time working out the details, particularly in terms of delaying the announcement of the National Mortgage Settlement until the full-scale probe was announced. Schneiderman was on board.

The next thing Schneiderman knew, he’d been appointed co-chair of the residential-mortgage-backed securities “working group” of President Obama’s Financial Fraud Enforcement Task Force. Then he was asked to be Michelle Obama’s guest at the 2012 State of the Union address, when Obama announced that he had asked Holder to begin a new investigation into pre-crash activities on Wall Street. “I did not come down to Washington just because of my charm,” Schneiderman says.

Once it became clear that no general release would be part of the National Mortgage Settlement and that the banks could face prosecution for their pre-crisis underwriting of mortgage-backed securities, H. Rodgin Cohen, a senior partner at Sullivan & Cromwell, went to see Schneiderman. Obviously, not just any lawyer gets a private audience with the New York attorney general. But the elfin Cohen is considered one of the deans of the Wall Street bar. “He was just a guy coming in to chat with me about the situation,” Schneiderman says, smiling. They agreed that since there was likely to be additional litigation, there could also be “a peace premium” paid by the banks to settle claims with the federal and state authorities. “We connected immediately,” Schneiderman recalls. “He was on the other side, but we saw things the same way.” In short order, the relationship would prove very useful to both men.


By March 2012, Tony West, a Harvard graduate, former assistant US Attorney in California and partner at the law firm Morrison Foerster, had replaced Thomas Perrelli at the Justice Department, and the hard work of the new task force began in earnest. Schneiderman quickly grew dissatisfied. The effort seemed amorphous and like a “Potemkin village” to him. The most important thing, he kept hearing from the Justice Department, was to lower expectations.

Schneiderman blew up again. “I was not about to let that happen to this working group,” he says. He wanted the group to have its own office space and a dedicated staff of investigators, and he wanted it to go for the jugular. Finally, Steve Linick, the inspector general of the Federal Housing Finance Agency (FHFA)—the agency that oversees the conservatorship of Fannie Mae and Freddie Mac—offered the working group some office space. “We raised a big ruckus,” Schneiderman says. “I think the White House eventually called up West and said, ‘You’ve got to do something,’ and then they hired a bunch of contractors and they started assigning assistant attorneys general in different US Attorneys’ offices around the country to actually do some work.” (West confirms that the White House contacted him to figure out what had Schneiderman so peeved.)

Subpoenas went out in February and March, and the investigations commenced. But winnable cases do not emerge overnight. “We have to prove intent, so sometimes we actually have to cross T’s and dot I’s a little bit more assiduously than might otherwise be the case,” a Justice Department official says. “Before we bring a case, we want to make sure that it’s a case we can actually go to court and win.” Schneiderman and his team were eager to have cases brought after supporting the National Mortgage Settlement. “They felt very exposed during this period and wanted to have something to show for the fact that they had made this deal,” says one person involved in the negotiations.

In October 2012, after a separate, independent investigation that lasted more than a year, Schneiderman sued JPMorgan in state court, claiming that Bear Stearns and its mortgage-origination subsidiary, despite legal representations to the contrary, had failed to properly evaluate the quality of mortgages that the firm was securitizing and selling to investors. In the complaint, Schneiderman argued that Bear Stearns—by then owned by JPMorgan Chase—had “systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans. Furthermore, even when [d]efendants were made aware of these problems, they failed to reform their practices or to disclose material information to investors.” As a result, the loans “included many that had been made to borrowers who were unable to repay, were highly likely to default, and did in fact default in large numbers.”

Schneiderman’s complaint was detailed and convincing, and it included the requisite outrageous e-mails. Bear Stearns bankers had referred to one securitization—known technically as SACO 2006-8—as “SACK OF SHIT” and “a shit breather.” Bear Stearns sold the debt deal anyway to investors all over the globe. To Schneiderman’s surprise, Dimon called him on the day he filed the complaint. It was unfair to blame JPMorgan for the wrongdoing that occurred at Bear Stearns, he argued. Schneiderman cut him off. “Look, just talk to your lawyers,” he said.

That same month, US Attorney Wagner and his team in Sacramento started issuing subpoenas to JPMorgan about what the bank had done in the years leading up the 2008 financial crisis. They reviewed hundreds of thousands of internal documents, took the sworn depositions of about a dozen JPMorgan bankers, interviewed dozens who had worked with the bank’s mortgage-backed securities, and spoke with the mortgage originators who had sold mortgages to JPMorgan. Wagner says he found “a pretty strong pattern” showing that “the very due-diligence process that was supposed to be identifying bad loans and weeding them out was essentially being subverted or circumvented in the rush to get these to market.” Momentum seemed to be building.

* * *

On March 6, 2013, Holder testified before the Senate Judiciary Committee about the so-called “too big to jail” Wall Street banks. Answering a question from Iowa Senator Chuck Grassley, Holder responded, “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute—if we do bring a criminal charge—it will have a negative impact on the national economy, perhaps even the world economy.” Holder’s comment angered many people who believed Wall Street bankers, traders and executives had to be held accountable for their actions leading up to the financial crisis, and that the Justice Department was shirking its responsibility. But his statement was consistent with what he had written in a now-famous June 1999 memorandum: “Prosecutors may consider the collateral consequences of a corporate criminal conviction in determining whether to charge the corporation with a criminal offense.” (To be fair, while the Holder memo did firmly establish the legal viability of using so-called “deferred prosecution agreements” with corporations, the tenor of the memo as a whole was that corporations should be prosecuted if their employees engage in wrongdoing.)

Schneiderman was infuriated with Holder for seeming to undercut his investigation’s efforts. His staff encouraged him to resign from the working group and denounce the administration. They believed that too much of his time was being wasted on what appeared to be a Sisyphean task. Instead, Schneiderman counterpunched. He went back to Capitol Hill and met with senators he hoped were sympathetic to his cause, including Elizabeth Warren, Carl Levin, Jeff Merkley and Sherrod Brown. “I let it be known that I was unhappy with what was going on,” he says.

The other co-chairs of the working group were not happy with Schneiderman’s public gambit. “Whenever you have somebody who you’re supposed to be working with and sharing information with—sharing sensitive information with—and then they kind of go and start talking to the press and blasting you, then that informs the way you deal with them going forward,” explains a person involved with the negotiations. Furthermore, a Justice Department official says Holder’s comments to Congress had no bearing on the determination of the Justice Department to prosecute the big banks. “We will investigate wherever the facts lead,” the official says. “I mean, as simplistic as it sounds, this is true.”

Around the same time, West asked his Justice Department colleague Geoffrey Graber, whom he had known from his years at Morrison Foerster, to assess the status of various pending investigations into Wall Street’s mortgage-backed securities business. There were ten US Attorneys investigating wrongdoing, and West wanted Graber to analyze which of these cases could be ready to file by the end of the year. Graber flew around the country, meeting with various US Attorneys, and reported back to West and Holder in the early summer. One of the cases that Graber concluded was furthest along was Wagner’s complaint against JPMorgan. The assessment, West says, “helped us to make some hard choices.”

After Graber issued his report, things picked up considerably. At that point, Holder started conducting almost weekly meetings at which, one participant said, “he became very, very engaged in pushing forward the work of the working group.” Even Schneiderman was pleased: “They started feeling a little bit more of the heat, and they started really to move,” he says.

On June 26, in Sacramento, Wagner hosted a team of JPMorgan lawyers to hear why the bank believed that the case he was building didn’t rise to the level of criminal or civil liability, and also to learn what JPMorgan’s likely defenses would be. Wagner was unmoved: “After listening to a day of their discussion and going back and looking up what we had, we felt pretty confident, and we were plowing ahead.” At that meeting, he recalls, none of the JPMorgan lawyers ever said, “Yeah, you’re crazy. This never happened.”

In early August, JPMorgan offered to settle the litigation for $1 billion in cash plus another $4 billion of mortgage-related relief. Leading the negotiations for the bank were Dimon and Stephen Cutler, the general counsel and a former chief of enforcement at the Securities and Exchange Commission. By then, Rodgin Cohen of Sullivan & Cromwell had joined the bank’s legal team. Unfortunately, the “ask” from the government to settle the cases was a bit higher: $21.8 billion.

“I thought it was almost a nonstarter,” West says, “and other people in the room said, ‘You know, at least it’s an invitation to talk’…. They knew that we had come back to them with a number that indicated our disappointment with their $1 billion. In fact, they said that to me directly. But that’s when the real conversation began.”

* * *


By late August, Wagner says, “the effort to put together a global negotiation was floundering.” He turned his attention back to the civil complaint he was preparing against JPMorgan. West was trying to see if a deal could be reached after Labor Day; if not, Wagner’s complaint would be filed. Schneiderman remembers thinking, “In September, this is either going to go forward or it’s going to go off the rails.”

On September 5, Richard Elias, an assistant US Attorney in Wagner’s office, sent Bruce Yannett, an attorney at Debevoise & Plimpton representing the bank, an e-mail with the subject line “JPMorgan—Confidential Settlement Negotiations.” Elias asked if Yannett wanted to see a draft of Wagner’s complaint, and Yannett responded that he did.

“Our purpose in sharing it with them was to show them that we were serious,” says a Justice Department official. “And if they were serious in trying to resolve it, they would see that we had fairly serious and well-founded allegations.”

Wagner’s complaint got Dimon’s attention. “It certainly quickened the pace of discussions,” Wagner says. “We were providing it to them, I think, both to show that we thought we had a very strong case, and also that it was coming very soon.” Cohen is convinced the potential filing was the tipping point. “What it meant was that this was all going to be splashed out in a filed complaint,” he says. “And I think once you start going public with allegations, it makes it more difficult for both sides to settle.”

Inviolate parameters for the negotiations were established quickly. JPMorgan wanted to resolve any potential criminal charges as part of the overall settlement. It didn’t want any statement of facts regarding wrongdoing by its bankers, and it wanted a broad release from future litigation. West responded that a statement of facts and the possibility of criminal charges were non-negotiable. “There were always some red lines that had been drawn, and each time JPMorgan chose to continue to engage,” he says. The bank increased its offer to $3 billion in cash and $4 billion in mortgage relief, and the Justice Department came down to $15 billion in cash, plus mortgage relief. In other words, the two sides were still far apart. “We had gotten as close as we could,” West recalls. The Justice Department decided to file Wagner’s complaint on September 24. Wagner flew to Washington for the press conference.

Late on the night of September 23, West had a heated conversation with Stacey Friedman, another senior JPMorgan lawyer. “It was clear that we had reached an impasse,” West recalls. He told Friedman that the Justice Department was planning to file Wagner’s complaint the next morning. Then he called Wagner and alerted him to the possibility that the negotiations could reopen at the last minute. (At around the same time that night, Schneiderman called Cohen and encouraged him to come back with one more offer.)

West called Friedman back early the next morning. “You never want to make big decisions when you are emotionally charged,” he says. “I wanted to make sure that the passion that we were both making our arguments with wasn’t clouding what we were saying to one another—that we actually understood what our positions were.”

But the same divisions prevailed: Friedman wanted the Justice Department to drop the threat of a criminal charge; she did not want a statement of facts; and she could not get remotely near West’s asking price. She also told West that Dimon might want to call him directly. West didn’t think much of it, because it seemed clear that the two parties weren’t going to be able to bridge the gap.

Thirty minutes later, Dimon called West and said, “I kind of think it’s important, when the stakes are this high, that the principals get to know one another.” The twenty-minute conversation was pleasant enough, West recalls. Dimon said that he wanted to come to Washington to meet with him and Holder and share his side of the story.

Dimon reiterated his mantra that it was “unfair” to hold JPMorgan responsible for wrongdoing at Bear Stearns and Washington Mutual—especially since the firm had bought Bear at the urging of the previous administration. West clarified that the complaint centered on alleged wrongdoing at JPMorgan itself, not Bear or WaMu, and he told Dimon that he wouldn’t arrange a meeting with Holder or postpone the filing of Wagner’s complaint unless Dimon agreed to two conditions: the meeting had to be held as soon as possible, preferably that day or the next, and Dimon had to agree to a significantly higher number than the $3 billion in cash that was on the table. Dimon said he thought September 26 might work but that he needed to check his schedule.

* * *

Afterward, West went into the office, where his first meeting of the day was with Holder and James Cole, the deputy attorney general, in Holder’s conference room. Just as he was telling the two men about his call with Dimon, his cellphone rang. It was Dimon again. West took the call, pacing back and forth at the far end of the room. Dimon proposed a meeting on September 26 and assured him that the bank would come back with a significantly increased offer. West agreed to recommend that Holder postpone the filing of Wagner’s complaint and meet with Dimon. That was an unprecedented move. It’s not every day that the attorney general of the United States postpones the filing of a civil complaint against a powerful Wall Street bank at the request of its CEO so that the two sides can cut a deal in private. Whatever was in Wagner’s complaint, Jamie Dimon did not want it to become public knowledge.

At one point in their second conversation, one person close to the negotiations recalls, Dimon started to chuckle and said something to West like, “You have so much power. You have no idea how much power you have.” West waved off Dimon’s assertion. “No, no, you have so much power,” Dimon repeated.

“Well,” West replied, “I’m not a Master of the Universe like you.” Dimon laughed and told West he would see him Thursday. The conversation with Dimon, plus those West was having with Cutler and Friedman, suggested that JPMorgan was planning to offer $6 billion to $7 billion in cash, plus $4 billion in mortgage relief. That estimate was not enough to stop the clock, but it was enough to buy some time. If the bank was willing to double its previous cash offer, West figured, he could probably get it into double digits.

For his part, Wagner was disappointed that the complaint would not be filed. “I had my nice blue suit on, and I was ready for the cameras,” he says. “Being out here in Sacramento, you don’t always get the opportunity to step on a national stage, so at a personal level, it was somewhat deflating. But on the other hand, you don’t let ego get in the way of these things. You want to do what’s right—not only for my case in the Eastern District of California, but for the department and the government generally. I’ve always been a team player, so it was back to negotiations.”

On September 26, Dimon, Cutler, Friedman and Matt Zames, the bank’s chief operating officer, met with Holder, West, Wagner and Cole in Holder’s fifth-floor office at the Justice Department. “They tell the story of JP and what’s happened with Bear, with WaMu,” a Justice Department official recalls. “They lay out their view of the case and the exposure, and they put on the table a $7 billion offer, which is sort of a global offer”—one that would resolve all the state and federal cases plus the federal agency cases. The litigation they were most eager to resolve was Wagner’s case. “They were concerned about that exposure.”

Wagner says the meeting was cordial: “Clearly they had brought the big guns to show that they were serious about wanting to negotiate.” Despite Dimon’s requests, Holder told the JPMorgan contingent at the meeting that any settlement would not eliminate the possibility of future criminal prosecution against the bank or individuals there. “They left with an absolute clear understanding that there was no way they were going to get the criminal case relieved through a settlement,” West says. (For the record, there has not been the slightest inkling that the Justice Department is working on a criminal complaint against JPMorgan Chase.)

At one point, Cutler warned that JPMorgan wouldn’t agree to a criminal charge. “We’re not going to do that,” he said. “Listen, we may not resolve this thing.”

Cohen recalls that “Jamie had a clear message—that the bank is represented by him, that he was very interested in a global settlement, that he was committed to getting it done. And there is a certain significance when the CEO does that. I think Holder himself was constructive, very can-do at that meeting, not by the specifics but by the tone he set. And it was a tone of ‘Let’s really see if we can get this done, and we do have some understanding for some of your positions.’ And when the attorney general speaks like that, presumably everybody else in the room on the government side understood where he was coming from.”

After the meeting, West and Cutler got to work on a comprehensive deal. Three separate working groups were established: one to draft the releases from future liability, one to reach an agreement on the cash settlement—which was mostly just back-and-forth between West and Cutler—and one to draft the required statement of facts. “There was concern that that was going to be very, very difficult,” West says.

The whole process was extremely tense. “There would be these bursts of energy,” according to one person involved in the negotiations, “and it would look like we were getting right to the end, and then there would be something that tanked the whole deal.” A real stickler was the amount of cash the bank would agree to pay. A week after the meeting, the Justice Department ordered everyone to stop working until the money point had been resolved. West was concerned that his negotiators would get the non-monetary aspects resolved but then get low-balled on the money. He insisted on getting $10 billion in cash, hoping he could get $9 billion. Cutler and JPMorgan were at $7.25 billion.

In mid-October, after negotiating directly with Holder again, this time by phone, Dimon agreed to settle the cases with $9 billion of his shareholders’ cash plus $4 billion in mortgage relief. The breakthrough allowed the working groups to restart, but soon Holder and West became concerned that JPMorgan would try to seek a reimbursement from taxpayers for the billions it was paying to the FDIC and other government agencies. “That issue almost derailed the entire thing,” West says.

Cutler told the Justice Department officials that JPMorgan’s board had approved the deal on the assumption—however perverse—that the bank would be able to get a reimbursement. Another tense moment came when the bank sought to credit against the settlement $1.1 billion in payments to the FHFA concerning separate contractual claims. The Justice Department was ready to file Wagner’s complaint within forty-eight hours of that conversation.

* * *


Very late in JPMorgan’s negotiations with the Justice Department—and despite the department’s agreement not to file the Wagner complaint—it almost became public anyway. In a completely different litigation filed in 2009, the Federal Home Loan Bank of Pittsburgh—one of twelve such banks created by Congress in 1932 to ensure that funding is available for mortgages—initiated a civil lawsuit against JPMorgan’s investment banking division, among other defendants, accusing JPMorgan’s bankers of selling it more than $1.7 billion in shaky mortgage-backed securities. “Pittsburgh FHLB believed that it had made a safe investment,” the bank stated in its amended complaint, but instead it had allegedly suffered some hundreds of millions in losses.

After the news broke in late September that JPMorgan had a deal pending with the Justice Department and the state attorneys general, and after word spread that the threatened filing of Wagner’s complaint had been a catalyst to the breakthrough in negotiations, lawyers for the Pittsburgh FHLB requested that JPMorgan turn over a copy. On October 17, a state judge in Allegheny County agreed and ordered JPMorgan to do so by November 1, or prove that the draft complaint did not exist.

JPMorgan didn’t want to comply with the court’s order, of course, and so it turned to the big guns at the Justice Department to try to quash, or at least delay, the Pittsburgh FHLB’s request. On November 1, Dana Yealy, the general counsel of the Pittsburgh FHLB, got a call from “attorneys with the Department of Justice” who wanted to speak with him “about some recent activity” involving the bank’s litigation against JPMorgan, according to an affidavit he submitted to the court. Yealy and his outside counsel then got on the phone with an unnamed attorney at Justice. “We were instructed we could not reveal the content of the call to anyone,” Yealy later reported. He received another call from Alyssa Kelman, an assistant general counsel at JPMorgan, who said she “understood” that Yealy had agreed to give the bank until November 15 to produce the draft complaint.

On November 14, West called Yealy and requested that he agree to another week’s extension. “He said he was very close to a final deal with JPMorgan, and that after one more week he would not care about the draft complaint,” Yealy recalled.

West also assured him that if he agreed to the new extension, the Justice Department wouldn’t support JPMorgan in its efforts to avoid turning over the draft complaint to the Pittsburgh FHLB. He was happy for the Pittsburgh bank to get whatever settlement it could from JPMorgan, just not at the expense of potentially screwing up the larger deal, especially since Wagner’s complaint—and keeping it out of the public realm—was one of the Justice Department’s main pieces of negotiating leverage with the bank. In an e-mail, DOJ officials acknowledged that JPMorgan’s determination to keep the complaint “from being released provided just enough leverage to help close the deal.” Yealy gave West until November 22.

On November 19, the Justice Department and the state attorneys general announced the $13 billion settlement, including $9 billion in cash to be paid to various federal and state agencies and another $4 billion to consumers “harmed by the unlawful conduct of JPMorgan,” in the form of loan modifications, mortgage principal forgiveness and efforts to reduce urban blight. The Justice Department made the explicit point that fully $2 billion of the $9 billion in cash was directly a result of wrongdoing at JPMorgan, not at Bear Stearns or Washington Mutual.

The Pittsburgh FHLB was not part of the Justice Department’s deal. On November 22, faced with Yealy’s new deadline, Kelman called him again. She asked for another extension before turning over the draft of Wagner’s complaint. This time, Yealy said no. At about 9 pm that night, JPMorgan made a motion to vacate the judge’s October 17 decision. The firm sought to delay any reconsideration of the order to release the draft complaint until January 2014. But the Pittsburgh FHLB fought back and asked for a hearing as soon as possible. “Public policy—the interests of full disclosure and transparency—demands just the opposite of what JPMorgan seeks,” the bank’s attorneys argued. “The circumstances of this motion therefore lead to one obvious question—what is JPMorgan trying to hide?”

Others were wondering the very same thing. Gretchen Morgenson, at the Times, perused the statement of facts that accompanied the settlement and came away unimpressed. “Much of it was the same-old-same-old, a not-very-lively description of a corrupted Wall Street mortgage factory, based largely on some facts that have been in the public domain for years,” she wrote on November 23. “In other words, although it took the Justice Department more than five years to pursue a major bank for its role in the mortgage mania, the investigation seems to have unearthed material that, by and large, could have been dug up with a spoon.”

JPMorgan argued to Judge R. Stanton Wettick Jr. that, in the wake of the $13 billion settlement, the draft complaint should not be turned over to the Pittsburgh FHLB. The Justice Department had provided JPMorgan with the document as a “confidential settlement communication,” the bank argued, and it should not be shared with the folks in Pittsburgh. Judge Wettick disagreed. He gave JPMorgan until December 17 to turn over the Wagner complaint. This time, the bank complied with the judge’s order. But still deeply concerned that the contents of the document would be made public by the Pittsburgh FHLB or its attorneys, JPMorgan quickly entered into settlement negotiations.

On January 3, JPMorgan Chase reached a confidential settlement with the Pittsburgh FHLB. One of the terms of the agreement was that the Wagner complaint would never see the light of day.


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