JP Morgan has been fined $13 billion for mis-selling mortgage-backed assets (MBA also known as mortgage-backed securities, MBS) in the lead up to the Global Financial Crisis. MBAs were the debt vehicle used to allow investors to profit from the boom in sub-prime loans. The idea is that even people and businesses with poor credit histories who could not otherwise expect to get a loan because of their higher perceived risk, will actually make their repayments.
So, by bundling loans to these higher risk borrowers together to make an MBA, the small number of borrowers that do default will be offset by the vast majority that repay their loans. Naturally, such borrowers had to pay more interest to compensate lenders for their higher risk. Of course, when the cracks in the MBA model became apparent, the global financial system nearly collapsed. Somebody is to blame.
JP Morgan was the target of investigations into its mortgage-backed securities activities since prosecutors believe it was aware of how risky these debt vehicles were, but misrepresented that risk to its clients. The $13 billion fine is the largest ever paid by a US company and will be paid to the US Treasury. It is made up of two elements: $9 billion fine and $4 billion to provide relief for affected home owners. The fine is said to settle civil law suits, but will not protect employees from federal criminal prosecutions in California or other criminal proceedings. JP Morgan is said to have set aside $23 billion to cover legal costs stemming from the sub-prime crisis.