JPMorgan Chase & Co. (JPM) and the German city of Pforzheim should settle a dispute over 56 million euros ($71 million) in losses on an interest-rate swap, a judge said.
The city should accept one-third of the amount, Presiding Judge Daniel Koehler told the parties at a hearing in Frankfurt today. While the city may win the case if it can prove that it wasn’t properly informed about the initial market value of the derivative, this isn’t guaranteed and proceedings may drag on for a long time, he said.
“A settlement would pour money in the city’s coffers right away,” Koehler said. “The amounts at stake aren’t peanuts and both sides face considerable risks in this case.”
The city of Pforzheim is among several European municipalities that lost millions of euros on derivative transactions that went sour. After Deutsche Bank AG (DBK), Germany’s biggest bank, lost a case over interest-rate swaps at Germany’s highest civil court last year, cities and small companies are trying to recover their losses in court.
Lawyers for the city said the settlement amount proposed by the judge wouldn’t be acceptable and that the city council must consider the issue. JPMorgan’s lawyer said he will discuss the proposal with his client. The court scheduled a ruling for March 23.
Deutsche Bank Mirror
Pforzheim bought the swap to mirror a derivative it had acquired from Deutsche Bank that accumulated 20 million euros of losses. Over time, the Deutsche Bank transaction turned positive, while the swap from JPMorgan incurred about 60 million euros in losses.
Under most interest-rate swap agreements sold to utilities, medium-size companies and cities, the lender paid a fixed rate and the customer an amount based on Euribor rates.
The top court’s reasoning in the Deutsche Bank ruling would apply in this case, so JPMorgan had a duty to disclose any negative market value, Judge Koehler said. While the city had experience with swaps and the negotiations were handled by two women with some knowledge in the area, that didn’t exclude the bank’s duty to advise its customer, he said. The court’s assessment is preliminary, the judge added.
“It’s pretty much like in the top court case, there was also a person with some economic education on the customer side,” Koehler said. “Our top court tends to increase the consumer-like protection it grants cities and small business.”
Pforzheim claims it didn’t know the negative market value was 23 million euros instead of 20 million euros. JPMorgan lawyer Carsten van de Sande told the court the bank always made clear its profit margin and structuring cost for the instrument were priced into the swap.
“You can’ take a chance without any risk,” said van de Sande. “Pforzheim could also have decided to simply pay back the 20 millon euros to Deutsche Bank at the time and not buy the swap from JPMorgan.”
Today’s case is LG Frankfurt, 2-25 O 669/10.
To contact the reporter on this story: Karin Matussek in Frankfurt via firstname.lastname@example.org
To contact the editor responsible for this story: Anthony Aarons at aaarons@Bloomberg.net.