More banks in the crosshairs after JPMorgan deal

October 23, 2013 by CNN Money

Wall Street has been abuzz this week with news that JPMorgan is on the verge of reaching a $13 billion settlement with the government, but the deal could be just one of many.

By James O’Toole @jtotoole

The settlement, which has yet to be finalized, relates to mortgage-backed securities sold by JPMorgan and the firms it later purchased, Bear Stearns and Washington Mutual. These securities, created by bundling payments from individual mortgages, were a key cause of the financial crisis, failing in huge numbers as the housing market imploded and borrowers defaulted on their loans.

The pending settlement, which has been billed as the largest ever for a financial firm, drew JPMorgan CEO Jamie Dimon personally to the Justice Department last month for negotiations with Attorney General Eric Holder. But several billion dollars’ worth of the deal under discussion relate to a lawsuit filed by the Federal Housing Finance Agency on behalf of Fannie Mae and Freddie Mac.

The agency has a number of other big banks in the crosshairs as well. JPMorgan was just one of 18 financial institutions the FHFA sued back in 2011, accusing them of selling Fannie and Freddie securities that “had different and more risky characteristics than the descriptions contained in the marketing and sales materials.”

Fannie and Freddie, the government-backed housing finance firms, sustained massive losses on mortgage-backed securities as the housing market imploded, requiring a bailout of over $187 billion. The firms have been controlled by the FHFA since their 2008 rescue.