US authorities are demanding JPMorgan Chase pay more than $6 billion to settle allegations it mis-sold securities to government-backed mortgage companies in the run-up to the financial crisis, according to people familiar with the discussions.

The bank is resisting the payment, which would be its single biggest penalty in a catalogue of expensive run-ins with US authorities and one of the largest post-crisis settlements by any bank, these people said.

It dwarfs the amount that JPMorgan is expected to pay to settle regulatory action over its “London whale” trading scandal and exceeds the penalties for its alleged manipulation of commodities markets.

The Federal Housing Finance Agency, a government regulator, sued JPMorgan and 17 other banks in 2011. It said the bank falsely claimed that loans backing $33 billion of mortgage-backed securities complied with underwriting guidelines and that it "significantly overstated the ability of the borrowers to repay their mortgage loans".

The securities were sold to Fannie Mae and Freddie Mac, which guarantee US home loans and also buy securities for their own investment portfolio. As borrowers began to default in 2007, the value of the securities fell sharply.

The agency is suing the banks in its role as regulator of Fannie and Freddie.

Mounting price tag
Although JPMorgan is refusing to pay the amount requested by the government, it expects to settle for billions of dollars, according to people familiar with the situation. The mounting potential price tag was partly responsible for a warning earlier this month that its legal bill could exceed existing reserves by $6.8 billion.

It is still possible that JPMorgan could reach a lower settlement than $6 billion or even win its case outright in court. But cases settled so far have seen banks pay out a high percentage of losses and banks are complaining that they have not had any significant rulings in their favour by the judge overseeing the case in the New York district court.

Last month UBS settled for $885 million compared with original losses that were estimated at about $1.15 billion. As the market recovered due to the improving economy, these were reduced to about $900 million, said people familiar with the case, making the Swiss bank's payment equal more than 90 per cent of the estimated losses.

The notional value of securities sold by JPMorgan are five times bigger than those sold by UBS.

Fraud allegation
Unlike the UBS lawsuit, the case against JPMorgan and some of the other banks alleges fraud, which the government says makes the offence more serious and strengthens its claims for substantial damages.

One point of contention is that a large proportion of the securities were sold by Washington Mutual and Bear Stearns, which JPMorgan bought with the support of the government as they teetered during the crisis.

JPMorgan and the Federal Housing Finance Agency declined to comment.

Meanwhile there was a new arrest yesterday in relation to the “London whale” trading scandal in which JPMorgan lost more than $6 billion on botched derivatives trades.

Spanish police arrested Javier Martin-Artajo, the former JPMorgan Chase banker accused of hiding hundreds of millions of dollars in losses in the affair.– Copyright The Financial Times Limited 2013