(Corrects article to say the settlement was with the federal government, not the Federal Reserve.)
NEW YORK (TheStreet) -- At one time, there was much speculation that Jamie Dimon, chairman and CEO of JPMorgan Chase (JPM), would be heading to Pennsylvania Avenue to become the Secretary of Treasury. While that did not transpire, it turns out that JP Morgan will still be making a significant contribution to the United States Treasury as it has agreed to pay a $13 billion fine due to illegal practices in the mortgage industry. The record fine only settles the civil charges according to one source, as the federal government retains the right to pursue criminal charges.
The settlement with the federal government follows a $4.5 billion deal that JPMorgan reached last Friday with 21 institutional investors for related matters. That, too, resulted from mortgage deals -- many of which came from the JPMorgan acquisition of Bear Stearns and Washington Mutual financial institutions -- that collapsed as a result of the Great Recession.
At the urging of the federal government, JPMorgan bought Bear Stearns in March 2008 and Washington Mutual in September 2008. At that time, many thought JPMorgan had purchased a tremendously undervalued asset due to the value of the prime brokerage unit of Bear Stearns, along with its signature headquarters building -- a piece of prime Manhattan commercial real estate.
The Great Recession, plus the devastation it inflicted upon the housing market, has resulted in an aftermath that will be costing the financial sector billions in fines. For the shareholders, the impact is already being felt on the bottom line. For the first time with Dimon at the helm, JP Morgan blamed last quarter's loss, of more than $9 billon, on legal expenses.
That will not be the last time shareholders of a financial institution will suffer from its transgressions over the course of the Great Recession.
Bank of America (BAC), as with JPMorgan, is looking at significant costs due to its buying Countrywide Credit. Recently, BofA lost a significant court case that resulted in it being liable for toxic mortgage backed securities that were issued by Countrywide before it was purchased. According to reports, the Federal Housing Finance Agency wants to fine BofA more than $6 billion. That could be even more bad news for others, such as Wells Fargo (WFC).
The nation's leading mortgage lender, and a Warren Buffett favorite, Wells Fargo, bested Citigroup (C), to acquire Wachovia in October 2008. Wachovia had huge problems with its mortgage portfolio, chiefly due to its buying Golden West Financial in May 2006 -- just before the onslaught of The Great Recession.
The losses Wachovia suffered from its mortgages were greater than the purchase price for that transaction, thereby weakening the once-venerable financial institution that it had to be taken over by Wells Fargo in a deal orchestrated by the federal government.
JP Morgan has placed $23 billion in a reserve to cover legal costs. So far, it is difficult to detect any negative impact of the billions in checks banks will be cutting, now or in the future, to satisfy regulators. For 2013, JP Morgan has risen more than 30%. Over the same period, the share price of Wells Fargo has also increased by over 30%. BofA, another Buffett holding, is up close to 30% since the first of the year. Wall Street hates uncertainty.
The sooner financial institutions settle these matters, the better for shareholders. Also, there are still many aggrieved parties, with reasons to sue based on illegal mortgage practices that contributed significantly to the Great Recession. It is likely that these settlements will encourage even more to go after banks for mortgage losses, with the federal government's actions providing the direction for how to proceed with the lawsuit.
At the time of publication, the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.