Finger-Pointing over FDIC Liability Will Continue After JPMorgan Deal
The Department of Justice and JPMorgan Chase & Co. finally sealed their $13 billion mortgage-backed securities deal on Tuesday, ending months of haggling over the size and shape of the settlement. In a key element of the agreement, the two sides resolved that JPMorgan can't recoup some Washington Mutual–related settlement funds from the Federal Deposit Insurance Corporation. In other words, the bank can't pay one part of the government only to demand cash back from another.
But that doesn't mean that JPMorgan and the FDIC are done fighting over the bank's WaMu acquisition.
JPMorgan might have asserted a claim against the FDIC for the portion of Tuesday's settlement that covers mortgage-backed securities issued by Washington Mutual, which JPMorgan acquired from the FDIC in September 2008. JPMorgan has asserted that it never assumed liability for those securities, while the FDIC maintains that it did. The Wall Street Journal reported Monday that the disagreement had posed a stumbling block to a settlement.
The full terms of the settlement agreement were not publicly available at press time, but according to the Justice Department's press release, JPMorgan won't seek any indemnification from the FDIC.
However, the agency and the bank are still butting heads in a separate $10 billion case brought by Deutsche Bank against JPMorgan and the FDIC. Deutsche Bank, which is the trustee for investors in $165 billion of WaMu-issued mortgage-backed securities, has demanded that either the FDIC or JPMorgan buy back defective loans packaged into these securities. JPMorgan and the FDIC have each insisted that the other is liable for those "put-back" claims.
A lawyer familiar with the case said that that the DOJ settlement doesn't affect the bank's position in the Deutsche Bank litigation.
The Deutsche Bank case has been dragging along since 2009, with no resolution of who is responsible for the repurchase claims. But Deutsche Bank has signaled that it believes JPMorgan assumed liability. In a brief that Deutsche Bank filed in June 2012 related to a discovery dispute, the bank stated: "The discovery record to date confirms that, before execution of the [WaMu purchase agreement], JPMC was concerned that it would assume the Mortgage Repurchase Liabilities and proposed contract language expressly carving out the Mortgage Repurchase Liabilities. The FDIC rejected the proposed language and subsequently informed JPMC that the Mortgage Repurchase Liabilities were included in the liabilities assumed by JPMC."
As the Litigation Daily reported, in 2011 U.S. District Judge Rosemary Collyer in Washington, D.C., refused to dismiss Deutsche Bank's claims against both JPMorgan and the FDIC. Instead, she held that discovery was needed to to determine what the FDIC and JPMorgan intended when the bank took over WaMu. The language of the WaMu purchase contract was too ambiguous, she held. Fact discovery was supposed to end last February, but the judge extended the deadline to Sept. 30. The parties are now engaged in expert discovery.
Deutsche Bank is represented by Boies, Schiller & Flexner. The FDIC has Hughes, Hubbard & Reed. JPMorgan is being defended by Sullivan & Cromwell, which also negotiated the WaMu purchase language for JPMorgan and represented the bank in its face-off with the DOJ.