JPMorgan settlement could cost it only US$9b after taxes
WASHINGTON/NEW YORK: JPMorgan Chase & Co's preliminary US$13 billion (RM41.18 billion) mortgage settlement with the United States government could end up costing the bank closer to US$9 billion after taxes, because the majority of the deal is expected to be tax deductible, two sources said.
The deduction also means the government is getting less than it appears in this deal. Banks can often deduct legal settlements from their taxes, but cannot get tax benefits from penalties for violating laws.
JPMorgan and the US government have been negotiating the tax treatment of the settlement. The outcome could have a dramatic impact on exactly what the deal ends up costing the bank, how it is perceived by the public and whether it becomes a model for resolving government investigations of mortgage deals at other banks.
JPMorgan is negotiating the settlement with a group of government agencies led by the Justice Department, and the deal is expected to include a US$2 billion penalty, one source said.
But another US$4 billion of the deal, which will go towards aid for struggling mortgage borrowers, is tax deductible, said another person familiar with the negotiations.
How the remaining US$7 billion will be addressed remains unclear, but most, if not all, is likely to be deductible.
Much of it is intended to compensate investors for shoddy mortgage securities they purchased from JPMorgan, as well as Bear Stearns and Washington Mutual, failing banks JPMorgan acquired during the financial crisis.
Those payments would usually be deductible as a normal business expense, as would payments by an appliance manufacturer to make good on defective washing machines, said tax expert Robert Willens.
If US$11 billion is tax deductible, and assuming a 38 per cent tax rate, the tax deduction could save JPMorgan as much as US$4.18 billion, Willens said. Reuters