Justin Sullivan/Getty ImagesDuring talks over a tentative $13 billion settlement, Attorney General Eric H. Holder Jr. refused to offer JPMorgan Chase a so-called nonprosecution agreement that would halt an inquiry in California.
At a museum on Fifth Avenue, in a sparkling reception hall overlooking Central Park, Jamie Dimon convened his top executives and their spouses last month for the Wall Street equivalent of a pep rally.
“I’m proud of the company,” Mr. Dimon, the chief executive of JPMorgan Chase, said at the party, held at the Museum of the City of New York, a mansion with a marble staircase and French doors. According to people who attended, Mr. Dimon said, “We will get through all of this,” referring to the legal and regulatory woes dogging the nation’s biggest bank.
The next week, Mr. Dimon aimed to put one of those woes behind him.
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On Sept. 24, four hours before the Justice Department was planning to hold a news conference to announce civil charges against the bank over its sale of troubled mortgage investments, Mr. Dimon personally called one of Attorney General Eric H. Holder Jr.’s top lieutenants to reopen settlement talks, people briefed on the talks said. The rare outreach from a Wall Street C.E.O. scuttled the news conference and set in motion weeks of negotiations that have culminated in a tentative $13 billion deal, according to the people briefed on the talks.
An account of the negotiations, based on interviews with these people, pulls back a curtain on the private wrangling to illuminate how the bank and the government managed to negotiate what would be a record deal. It also sheds new light on the hands-on role that Mr. Dimon and Mr. Holder played in the talks. And it highlights how Mr. Dimon has so far maintained the support of the bank’s board when other Wall Street chiefs were derailed by the financial crisis.
Much of the deal came down to dollars and cents. Mr. Dimon, the people said, signaled during that Sept. 24 call that he was willing to increase JPMorgan’s offer to settle an array of state and federal investigations into the bank’s sale of troubled mortgage securities before the financial crisis. The government, these people said, had already balked at the bank’s two initial offers: $1 billion and $3 billion.
And so that same week, Mr. Dimon traveled to the Justice Department in Washington for a meeting with Mr. Holder that underscored how expensive the healing process had become. At the meeting, the people briefed on the talks said, JPMorgan executives raised the offer to $11 billion, $4 billion of which would serve as relief to struggling homeowners.
But Mr. Holder wanted more money to resolve the civil cases, the people said. And despite the bank’s requests, he refused to provide JPMorgan a so-called nonprosecution agreement that would halt an investigation from prosecutors in California, who were scrutinizing the bank’s mortgage securities. Instead, the people said, he informed Mr. Dimon that the Justice Department wanted JPMorgan to plead guilty to a criminal charge in that case, an unusual show of force against a Wall Street bank.
While they were unable to strike a deal that day, Mr. Dimon and Mr. Holder kept in close touch, talking five times in the last two weeks. Late Friday, on the last of those calls, they finally reached the tentative deal: $13 billion and no promise of dropping the criminal investigation.
The deal, which could still fall apart over issues like how much wrongdoing the bank would admit, would be a record accord for the Justice Department. A single corporation has never before paid this much to settle.
The deal might also embolden the Justice Department and set a precedent for the agency’s investigations of Wall Street. Using the JPMorgan case as a template, and relying on a law that extends the legal deadline for filing certain financial fraud cases to 10 years from five, the Justice Department is planning to take action against other big banks suspected of selling troubled mortgage securities.
For JPMorgan, once known as Washington’s favorite bank, the deal would be a stunning reversal of fortune.
Complicating matters for the bank, Mr. Dimon is inextricably linked to the settlement. With the government, he assumed the role of chief negotiator. And at the bank, as illustrated at the museum gathering last month, he remains its chief cheerleader.
Mike Segar/ReutersThe bank’s headquarters in Manhattan.
He has embraced the dual roles, and the mantle of peacemaker, as the bank faces scrutiny from across the government. At least seven federal agencies, several state regulators and two foreign countries are investigating the bank. The multifront campaign includes everything from a $6 billion trading loss in London last year to the hiring of well-connected employees in China.
The mortgage case presented the greatest test. Not only are several state and federal agencies involved, but the cases stem from a politically charged issue at the center of the financial crisis: the mortgage bubble.
When credit flowed freely in the run-up to the crisis, banks routinely bundled subprime and other risky loans into securities that they sold to investors. When homeowners fell into foreclosure and the investments soured, it caused billions of dollars in losses for the investors. In turn, government authorities began to question whether the banks properly warned of the risks.
Banks have countered that the risks were fully disclosed and that the investors, including pension funds and other institutions, were sophisticated entities.
Some defense lawyers also question whether the government is going too far. A $13 billion penalty would be more than half of JPMorgan’s profit last year. And some of the mortgage securities in question are not JPMorgan’s. Rather, the bank inherited the liabilities when it bought Bear Stearns and Washington Mutual in 2008, at the height of the financial crisis.
Even now, a significant obstacle stands in the way of a deal: whether JPMorgan will admit to all of the improper actions cited by the Justice Department. Banks are typically loath to acknowledge wrongdoing, fearing it could expose them to shareholder lawsuits.
A spokesman for JPMorgan declined to comment. A Justice Department spokeswoman did not return a request for comment.
The Justice Department’s negotiations with JPMorgan began in earnest this summer. In July, prosecutors from the civil division of the United States attorney’s office in Sacramento made a presentation to JPMorgan that outlined the case against the bank.
Tony West, the associate attorney general, then had a meeting with the bank in his conference room at the Justice Department in Washington. It was at that meeting in July that the talks broadened to include other mortgage-related cases.
In addition to the civil and criminal cases in Sacramento, which focused on the bank’s own mortgage securities, other cases zeroed in on securities sold by Bear Stearns and Washington Mutual. The Justice Department’s civil division had an inquiry into Bear Stearns, prosecutors in Pennsylvania were scrutinizing deals from Washington Mutual and New York’s attorney general had already filed a lawsuit involving Bear Stearns.
Then, about the time of another meeting in early August, JPMorgan asked to include a lawsuit from the Federal Housing Finance Agency. The agency, which sued JPMorgan over loans the bank and Bear Stearns had sold to Fannie Mae andFreddie Mac, would go on to make up a big part of the $13 billion pact.
But at that point, one person briefed on the talks said, the bank was offering only $1 billion to settle. Another person said the $1 billion offer was not meant to include the F.H.F.A. case.
Either way, by mid-August, settlement talks had stalled somewhat. They were far apart on the monetary penalty, and JPMorgan continued to push for the Sacramento prosecutors to drop the criminal inquiry, a request the government resisted.
The criminal case was still at an early stage. But the prosecutors in Sacramento had all but finished their civil lawsuit against the bank. And so they informed the bank that a lawsuit was coming on Sept. 24.
In the lead-up to that deadline, JPMorgan’s lawyers raised the offer to $3 billion. They conveyed it to Mr. West, who became the central negotiator for the government. But Mr. Holder rejected the offer, telling colleagues it was still too low.
In the days that followed, the Justice Department quietly planned the news conference to announce the civil case.
Benjamin B. Wagner, the United States attorney in Sacramento whose investigation into the bank’s mortgage practices led to the charges, boarded a plane to Washington so he could attend a news conference the next day. And during a 45-minute meeting at the Justice Department, Mr. Holder gathered with top aides in his fifth-floor conference room to prepare for the news conference.
But at 8 a.m. on Sept. 24, just four hours before the scheduled news conference, Mr. West received a call from an unexpected source: Mr. Dimon.
“I think we should meet in person,” Mr. Dimon said, one person briefed on the call said.
The meeting took place in Mr. Holder’s conference room two days later. Mr. Dimon’s entourage included his general counsel, Stephen Cutler, and his outside counsel, H. Rodgin Cohen of Sullivan & Cromwell.
Progress was made. The bank had agreed to enhance the offer to $11 billion, including the $4 billion for homeowners. And both sides discussed how to deploy the relief, including through reductions in mortgage balances. But a deal had yet to emerge. The Justice Department still wanted more money. And it informed the bank that to resolve the criminal investigation in Sacramento, it should be pleading guilty to a criminal charge. The bank balked.
For days, little happened. The government shutdown complicated the talks, as many of the civil prosecutors in Sacramento were furloughed.
But Mr. Dimon kept negotiating. He had the first of five calls with Mr. Holder in early October. After the bank’s board met last week, Mr. Dimon again contacted Mr. Holder.
It was not until Friday that JPMorgan backed down from its demand that the criminal case go away. Rather than resolve that case now, JPMorgan decided to let it play out. One person close to the bank noted that bank lawyers were skeptical it would actually produce charges. If criminal charges arise, it could mean additional fines and a deal that requires an independent monitor to keep an eye on the bank.
On a final call that Friday night — Mr. Cutler, Mr. West, Mr. Holder and Mr. Dimon all joined the call — the C.E.O. asked, “What will it take to get this done?”
Mr. Holder informed him that the government would not accept less than $13 billion. And with that, they had a tentative deal.
Mr. Holder and Mr. Dimon left Mr. Cutler and Mr. West to hash out the nuances.
