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JPMorgan's Dimon put in a rough spot

Pressure from an unlikely source forces JPMorgan into talks.

October 24, 2013|By E. Scott Reckard, Marc Lifsher and Andrew Tangel
  • Jamie Dimon, chairman of JPMorgan Chase & Co., offered to reopen settlement talks.
Jamie Dimon, chairman of JPMorgan Chase & Co., offered to reopen settlement… (SAUL LOEB, AFP/Getty Images )

Jamie Dimon, arguably the nation's most powerful banker, has navigated intense scrutiny from Congress, the White House and regulators around the globe.

But it's a federal prosecutor in Sacramento, far from the world's financial and political capitals, who pinned the chairman of JPMorgan Chase & Co. to the wall.

U.S. Atty. Benjamin B. Wagner led the investigators who forced JPMorgan into talks now widely expected to produce a $13-billion settlement of fraud allegations. His team delivered key evidence revealing how JPMorgan misled investors while peddling bonds backed by subprime and "liar" loans from the housing bubble.

Wagner's probe posed an additional threat that Dimon could not afford to ignore: criminal charges against the bank. Beyond fines and settlements, a conviction could batter the bank's business, sending institutional investors fleeing to competitors.

The Sacramento mortgage fraud team had grown organically from the Central Valley, at one point home to five of the 10 cities with the nation's highest foreclosure rates. The office launched a mortgage fraud task force in 2007, as the bottom fell out of home prices that had been inflated by Wall Street chicanery.

"The Valley was ground zero for the mortgage fraud meltdown," said McGregor Scott, the U.S. attorney who preceded Wagner and launched the task force.

The team started small and local, targeting foreclosure-rescue scams and real estate insiders who ripped off lenders. In 2009, when Atty. Gen. Eric Holder called on prosecutors across the country to join Washington- and New York-based mortgage fraud probes, Wagner raised his hand. He was named co-chair of the department's Mortgage Fraud Working Group and would end up heading the JPMorgan probe.

"We sort of stepped up and volunteered," he said.

On Sept. 23, Wagner boarded a plane for Washington, headed for a Justice Department news conference to announce his office would file a civil lawsuit against the nation's largest bank. Charts were created to explain the financial alchemy used to turn subprime loans into supposedly high-quality securities. One-hundred copies of the JPMorgan suit had been printed for reporters.

Then Dimon blinked. He made an eleventh-hour call to the Justice Department offering to reopen settlement talks.

The impending deal marks a stunning comeuppance for a firm once seen as a white knight of the financial crisis. JPMorgan, at the urging of top U.S. regulators, had swallowed collapsing firms such as Washington Mutual and Bear Stearns in emergency acquisitions.

Dimon has since explained away many fraud allegations against JPMorgan as the inherited problems of lesser banks. But the allegations underpinning Wagner's case involve JPMorgan alone, operating at the height of the housing boom, packaging high-risk loans into securities that would later go sour.

Buyers of the bonds included the California Public Employees' Retirement System, the nation's largest pension fund, which says it handed JPMorgan $376 million for securities that would later plummet in value. JPMorgan, the government alleges, had neglected to tell investors just how shaky the underlying home loans were.

The threat of a Sacramento-based criminal prosecution — which could still proceed — played a crucial role in the negotiations for civil penalties. Billionaire investor Warren Buffett sized up the threat to a financial firm earlier this week.

"You have no ability to negotiate," he said Tuesday on Bloomberg Television. "Basically, you've got to be like a wolf that bares its throat, you know, when it gets to the end. You cannot win."

Appointed as a U.S. attorney by President Obama in November 2009, Wagner oversees federal law enforcement in the Eastern District of California from a 16-story citadel. Fortified against terrorists after the 1995 bombing of the Oklahoma City federal building, it opened in Sacramento in 1999.

Such high-profile corporate probes might more typically be handled by the U.S. attorney's office in Manhattan, or perhaps higher-profile California offices.

"We tend to be overshadowed by Los Angeles and San Francisco," Wagner said. "But this is a big office, and a sophisticated one."

The office employs 85 lawyers, mostly in Sacramento and Fresno. That compares with about 250 lawyers in the Central District of California, which has offices in Los Angeles, Santa Ana and Riverside. But numbers don't tell the whole story, Wagner said.

"One advantage is we tend to have less turnover than L.A.," he said. "We have a quite a cadre of experienced prosecutors."

The office has handled its share of high-profile cases. It was involved in the investigation of Theodore Kaczynski, who pleaded guilty in 1998 to the two-decade Unabomber spree that injured 23 people and killed three, including a timber industry lobbyist in Sacramento.

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