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Exclusive: U.S. using JPMorgan penalty to speed cases against other banks

By Aruna Viswanatha and Karen Freifeld

WASHINGTON/NEW YORK (Reuters) - The U.S. Justice Department is spending some of the $13 billion JPMorgan Chase & Co agreed to pay to settle claims stemming from mortgage misdeeds to speed up similar punishments against other lenders, possibly including Bank of America Corp and Citigroup, according to people familiar with the matter.

    U.S. Attorney's offices that have been among the most active in probing banks over the toxic loans they bundled into mortgage securities and sold to investors have received funds to hire new civil prosecutors, the people said.

U.S. Attorneys in New Jersey, Colorado and the Eastern District of California, based in Sacramento, are among those most experienced in pursuing the probes, the people said.

    The increased activity is a sign that President Barack Obama is trying to follow through on his 2012 pledge to hold more banks accountable for their role in the housing crisis, after prosecutors faced criticism for little high-profile action. Attorney General Eric Holder has also expressed a desire to wrap up more of mortgage securities-related cases this year.

    "There is a widespread recognition that the banks have not yet been held fully accountable for their origination practices and the harm that did to borrowers, investors and the American economy in general," said Don Hawthorne, a partner with Axinn, Veltrop & Harkrider in New York who has represented clients in mortgage-backed securities litigation.  

    The Justice Department's portion of the JPMorgan settlement went to the U.S. Treasury, but the department can keep up to three percent of money it collects for other federal agencies to use for certain purposes. The DOJ settlement with JPMorgan also resolved lawsuits from other agencies, including the Federal Deposit Insurance Corporation.

    In addition to Bank of America and Citigroup, the government has been investigating other banks, including Royal Bank of Scotland, Credit Suisse AG, and Goldman Sachs Group Inc, people familiar with the investigations said.

    In the wake of the government's landmark settlement against JPMorgan last year to resolve probes into shoddy mortgage securities, authorities may reach settlements with both Bank of America and Citigroup this summer over similar charges, people familiar with the matter said. The JPMorgan settlement included about $4 billion to resolve claims from the Federal Housing Finance Agency.

    Bank of America has discussed paying about $12 billion, with more than $5 billion of that going to help struggling borrowers, to resolve a range of federal and state probes, according to people familiar with the talks. That would be on top of the $6.3 billion the bank has already paid to resolve claims from the FHFA.

The Justice Department suggested a $17 billion settlement in the latest round of negotiations and did not view Bank of America's most recent offer as a serious one, one of the people said.

Reuters could not determine the range of penalties Citigroup is potentially facing, but one analyst estimated the bank could face a settlement of about $5 billion, including about $2 billion in consumer relief.

    Bank of America spokesman Lawrence Grayson declined to comment on the investigations and negotiations. Representatives of Goldman, Citigroup, RBS and Credit Suisse declined to comment.

Representatives of the Justice Department and U.S. Attorney offices in New Jersey, Colorado and Sacramento declined comment.

As part of the effort to accelerate the probes, the Justice Department is also spreading the work among offices with experience in similar cases, and in some situations reassigning cases. An investigation into Goldman Sachs, for example, was moved from the U.S. Attorney's office in Philadelphia to Sacramento, which had worked on the JPMorgan case, according to two people familiar with the matter. Representatives of both of those offices declined comment.

   

    MERRILL PROBE

    The negotiations between Bank of America and the Justice Department, fueled by a threatened lawsuit against Merrill Lynch from civil prosecutors in New Jersey, have yielded back-to-back meetings in the past two weeks, one source said, though no meetings have yet been scheduled after the bank's latest offer.

The U.S. Attorney's office in New Jersey is drafting its complaint against Merrill, though does not have specific plans to file it yet, the person said. Bank of America agreed to acquire Merrill at the height of the 2008 financial crisis, along with some of its liabilities.

    The probes date to 2012, when Obama directed the Justice Department to create a task force to investigate the packaging and sale of home loans. After earlier inquiries fizzled, the Justice Department took a more systematic approach, issuing more than a dozen subpoenas in early 2012 to financial institutions.    

    Civil fraud inquiries into banks including Citigroup and Merrill Lynch were prioritized, sources said. Holder took an active interest in the investigations, receiving regular briefings on developments. 

    Three U.S. Attorney offices divided the investigations into Bank of America and its units, with Los Angeles examining Countrywide, Charlotte taking on Bank of America itself, and New Jersey leading the probe of Merrill Lynch, sources said.

    A magistrate judge earlier this year recommended dismissing a lawsuit the U.S. Attorney's office in Charlotte brought against the bank over fraud in the sale of mortgage securities, and a federal district judge considered the recommendation at a Wednesday hearing, a ruling in which could give the bank leverage in negotiations. 

    The talks also include the U.S. Attorney's office in Brooklyn, which has been investigating whether the bank properly submitted mortgage loans for government insurance provided by the Federal Housing Administration, people familiar with the matter said.

    That probe has focused on loans the bank made after May 2009, since Bank of America paid about $500 million in 2012 to resolve liability over loans it sold earlier than that. Mortgage originations plunged in the aftermath of the 2007-2009 financial crisis, however, and it's unclear how much liability the bank faces through that inquiry.

    The Justice Department's negotiations are being led by its No. 3 official, Tony West, who oversees the agency's civil efforts. Bank of America's team includes Meyer Koplow of Wachtell, Lipton, Rosen & Katz and the bank's general counsel Gary Lynch, sources said.

New York Attorney General Eric Schneiderman's office is also involved in negotiations, according to a person familiar with the talks. Schneiderman is one of four co-chairs of the working group that is coordinating the investigations.

His office also advised the bank months ago that it planned to recommend an action against Merrill Lynch, according to a February filing from the bank. A spokesman for Schneiderman declined comment.

    The negotiations do not include a separate civil mortgage fraud case brought by the U.S. Attorney's office in Manhattan, which convinced a jury last October that the bank was liable for fraud through loans sold by its Countrywide unit. The government has asked for more than $2 billion in penalties but a judge has yet to rule on that request. 

    

    ADVERTISING FOR ATTORNEYS

    Several U.S. Attorney offices including the Eastern District of California, which handled the JPMorgan investigation, recently advertised for new attorneys to work on its civil mortgage fraud enforcement cases and other types of fraud on the government.

    A spokeswoman for U.S. Attorney Benjamin Wagner in Sacramento declined to comment on specific hires but said that the working group "has been very supportive" of the office. "We are currently in the process of evaluating our needs and determining how additional resources could best be utilized," the spokeswoman said.

    A spokesman for U.S. Attorney Loretta Lynch's office in Brooklyn said it's also in the process of hiring new assistant U.S. attorneys but declined to discuss their roles. The new resources suggest the government may pursue cases tied to the financial crisis for several more years, and reflect the amount of work necessary to move the complicated cases across the finish line, sources said.

But observers say the government must do more than force big penalties, and should enforce standards and adequate disclosures for borrowers and investors, which some argue does not seem to be a priority.

    "Even if we look at these settlements as punitive, we cannot look at them as corrective," said Joshua Rosner, managing director of Graham Fisher & Co., a New York based independent consultancy. "If you don't fix the system going forward, you may have extracted monies, but you haven't done anything to ensure this doesn't happen again in the future."

 

 

(additional reporting by Peter Rudegeair in New York. Editing by Karey Van Hall and John Pickering)

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