JP Morgan has agreed to pay $4.5 billion to investors who lost money on mortgage-related securities during the financial crisis.
The settlement is with 21 major institutional investors.
Mortgage-related investments were a major factor in the crisis, which began in 2007 with the collapse of the US housing market.
Last month JP Morgan agreed a separate, preliminary $13 billion deal with the US government over mortgage securities.
As part of that deal $5.1 billion would go to settle charges that the bank misled mortgage giants Fannie Mae and Freddie Mac during the housing boom. That settlement was the biggest ever by a US bank.
JP Morgan has agreed to pay $4.5 billion to investors who lost money on mortgage-related securities during the financial crisis
Now, 21 institutional investors that put money into more than 300 residential mortgage-backed securities are to be reimbursed by the bank.
The securities in question were issued between 2005 and 2008 by JP Morgan and Bear Stearns – a bank which it took over during the financial crisis.
“This settlement is another important step in JP Morgan’s efforts to resolve legacy related… matters” stemming from mortgage-related securities, JP Morgan spokeswoman Jennifer Zuccarelli said in a statement on Friday.
Friday’s deal still has to be accepted by trustees for the trusts that hold the securities.
A final settlement with the US Justice Department is expected to be announced soon.
Mortgage-backed securities were sophisticated financial products created by many investment banks in the run-up to the financial crisis.
These special bonds contained a mix of investments but at their heart were supposed to be risk-free home loans.
When the housing bubble burst, the value of these assets fell sharply and the credit markets seized up. The balance sheets of many US and European banks, including those in the UK, became toxic and they had to be bailed out by their governments.
What JP Morgan is alleged to have done was sell the mortgage-backed assets knowing full well that many of the home loans were in fact very risky.
The New York Attorney General has sued JP Morgan Chase for allegedly defrauding investors who lost more than $20 billion on mortgage-backed securities sold by Bear Stearns.
JP Morgan bought the investment bank Bear Stearns in March 2008.
It said that it would contest the allegations.
This is the first action to come out of a working group created by US President Barack Obama looking into the causes of the 2008 financial crash.
JP Morgan said: “The NYAG civil action relates to Bear Stearns, which we acquired over the course of a weekend at the behest of the US government. This complaint is entirely about historic conduct by that entity.”
US mortgage-backed securities were the investment products that sparked the global financial crisis in 2008.
In essence, each security or bond was linked to pools of US mortgage loans, many of which were classified as sub-prime – mortgages awarded to high-risk and low-wage homeowers.
When many of those homebuyers defaulted on their mortgages as the US property bubble burst, it turned the linked securities into bad debt.
This caused billion-dollar losses at banks, who were forced to write down the value of their investments.
Banks around the world were affected, not just those in the US, because the securities were resold globally.
The securities had been widely purchased because rating agencies had mistakenly given them the highest possible credit rating.
As banks realized they were sitting on huge liabilities, they halted lending to each other, freezing up the global financial system in the process and making it harder for businesses and individuals to borrow funds.
The civil suit, filed by New York Attorney General Eric Schneiderman, accuses Bear Stearns of failing to ensure the quality of loans underlying residential mortgage-backed securities.
It relates to securities sold by Bear Stearns in 2006 and 2007 – before it was taken over by JP Morgan.
The legal action claims the bank “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”.
It says that this led to the inclusion of mortgages on which borrowers were likely to default, and that investor losses in 2006 and 2007 totalled more than a quarter of the original £87bn value of the securities.
The NYAG wants the company to pay an undisclosed amount of damages for investor losses “caused, directly or indirectly, by the fraudulent and deceptive acts”.