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Negotiation lessons from firms under fire

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If the J.P. Morgan Chase deal holds, it will include the largest settlement payment the government ever has negotiated from a single corporation.

Sometimes the goal in negotiation is to improve your fortunes. At other times the best you can hope for is to lessen the fallout from past mistakes.

Take the case of J.P. Morgan Chase, which in late September was threatened with civil charges from the U.S. Department of Justice for its sales of dubious mortgage investments during the financial crisis. Morgan Chase CEO Jamie Dimon’s hands-on negotiations to settle the case, as recounted by Ben Protess and Jessica Silver-Greenberg in The New York Times , serve as a reminder of the burdens we sometimes must assume to head off a disaster.

Though Morgan Chase appeared to weather the credit crisis better than many other large American banks, by 2013 it was facing an avalanche of government investigations into potentially illegal activities. Most prominently, the bank stood accused of bundling subprime mortgage loans into securities and selling them to investors during the housing bubble without proper warning of the risks involved.

In July, Associate Attorney General Tony West met with Morgan Chase executives at the Department of Justice’s headquarters to outline an array of civil and criminal investigations being conducted in various jurisdictions nationwide. Along with its own behaviour, the bank would be held responsible for any charges stemming from improper sales of mortgage securities by two banks it had purchased during the financial crisis, Bear Stearns and Washington Mutual. In the United States, companies assume the legal liabilities of the firms they acquire unless they negotiate otherwise. Morgan Chase apparently failed to negotiate more favourable terms in 2008.

During a meeting in August, Morgan Chase asked the government to persuade the U.S. attorney’s office in Sacramento to drop a criminal inquiry it had opened. The Department of Justice rejected Morgan Chase’s $1 billion settlement offer.

The Sacramento prosecutors told the bank to expect a civil lawsuit on September 24 and said that a criminal case was still on the table. As the deadline approached, Morgan Chase’s lawyers informed West that they were raising their offer to $3 billion, but Attorney General Eric Holder said that the amount still was far too low.

At 8 a.m. on September 24, four hours before the department’s scheduled news conference to announce the charges against Morgan Chase, Dimon called West and asked to meet in person. The news conference was scuttled.

Two days later, at a meeting between the bank’s lawyers and Holder, West and their team, Dimon increased Morgan Chase’s settlement offer to a hefty $11 billion. Holder insisted that Morgan Chase would have to pay more to resolve the civil cases and also accept a criminal charge, the Times reports.

Negotiations slowed amid the federal government shutdown. In early October, however, Dimon moved talks forward with a series of calls to Holder. Meanwhile, to reassure investors of its financial health, Morgan Chase disclosed that it had set aside $28 billion to cover legal expenses.

On October 18, Morgan Chase backed down from its demand that the government call off the criminal case after its lawyers advised Dimon that actual charges were unlikely.

“What will it take to get this done?,” Dimon asked during a conference call with Holder, West and others that night. Agree to pay $13 billion, Holder told him. Dimon agreed.

More than $6 billion of the sum reportedly will compensate institutional investors that suffered huge losses from mortgage securities sold primarily by Bear Stearns and Washington Mutual. Another $4 billion will be paid to struggling homeowners. The remaining $3 billion will serve as a fine.

At this writing, the parties still needed to resolve critical issues, such as how much wrongdoing Morgan Chase is willing to accept responsibility for. If the deal holds, it will include the largest settlement payment the government ever has negotiated from a single corporation. The government reportedly plans to use the Morgan Chase case as a template for investigations of other large banks accused of selling dubious mortgage securities.

Here are some negotiation lessons from firms under fire:

Envision future scenarios

During acquisition negotiations in 2008, when it had leverage against the government, Morgan Chase failed to negotiate for ironclad protection against potential liabilities at Bear Stearns and Washington Mutual.

Take calculated risks

Morgan Chase was able to concede on the issue of criminal charges after its lawyers concluded that the risk of such charges was low. The calculation hints at the value of making careful risk assessments in negotiation.

Signal serious intent

By appointing himself lead negotiator, Dimon conveyed to the government that he was committed to forging a deal. When a negotiation stalls, “sending in the big guns” can be an effective means of moving forward.

From Program on Negotiation at Harvard Law School

© 2013 Harvard University

The New York Times Syndicate

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