JPMorgan Chase & Co.’s (JPM) tentative agreement to pay a record $13 billion to end civil claims over its sales of mortgage bonds has hit a snag because of the bank’s bid to make the Federal Deposit Insurance Corp. liable for part of the payment, a person familiar with the talks said.
The U.S. Justice Department is opposing JPMorgan’s request that the FDIC assume liability for investors’ losses stemming from Washington Mutual Inc., the person, who sought anonymity to discuss the private negotiations, said today. JPMorgan acquired Washington Mutual’s assets in 2008.
Resolving part of the $13 billion tentative agreement today, JPMorgan agreed to pay $5.1 billion to settle Federal Housing Finance Agency claims related to home loans and mortgage-backed securities the bank sold to Fannie Mae (FNMA) and Freddie Mac. (FMCC)
The settlement includes $4 billion to resolve claims over mortgage bonds and $1.1 billion to settle claims that JPMorgan sold faulty mortgages directly to Fannie Mae and Freddie Mac that the companies packaged into their own securities, the FHFA said today in a statement.
In the FHFA agreement, JPMorgan preserved its right to seek FDIC reimbursement for FHFA claims stemming from Washington Mutual’s estate, which is managed by the FDIC. JPMorgan has been in a legal battle with the FDIC over who should pay certain liabilities from the failed thrift, which the agency placed into receivership in 2008, selling JPMorgan the remaining assets.
While today’s agreement with the FHFA prohibits JPMorgan from seeking money directly from the FDIC, it doesn’t exclude reimbursement from the WaMu receivership set up by the agency.
The Justice Department is seeking to preclude JPMorgan from seeking reimbursement from the WaMu receivership in the other part of the $13 billion agreement, according to the person who spoke on condition of anonymity.
The tentative $13 billion agreement was described last weekend by two people with knowledge of the situation. It would mark the largest amount paid by a financial firm in a settlement with the U.S. The payment would amount to more than half of JPMorgan’s profit last year. Only seven companies in the Dow Jones Industrial Average earned more than $13 billion in 2012, according to data compiled by Bloomberg.
JPMorgan Chief Executive Officer Jamie Dimon, 57, is seeking to settle multiple civil claims that the company misrepresented the quality of mortgage-bonds that were packaged and sold at the height of the U.S. housing boom by JPMorgan, Washington Mutual and Bear Stearns Cos., which also was acquired by the New York-based bank in 2008.
The settlement would include about $3 billion for states and federal regulators, two people briefed on the matter said earlier this week. It also would cover a $2 billion penalty against the bank. About $4 billion would go to help homeowners in hard-hit metropolitan areas, said the people, who asked not to be identified because the negotiations aren’t public.
A settlement including funds from JPMorgan to pay investors in Washington Mutual mortgage securities “could be seen as setting a negative precedent” for the bank as it seeks to have the FDIC cover WaMu’s liabilities in private suits on behalf of bondholders, Barclays Plc analysts including Sandeep Bordia and Jasraj Vaidya wrote in an Oct. 23 report.
Deutsche Bank AG (DBK), as a mortgage-bond trustee, filed a suit in 2010 saying either JPMorgan or the FDIC owed $6 billion to $10 billion for flawed mortgages in WaMu securities. JPMorgan has argued its purchase of WaMu assets in 2008 was structured in a way in which it shouldn’t liable. The FDIC has said the bank is responsible.
JPMorgan said in a November 2010 court filing in the lawsuit that it “never assumed any liability” for the claims asserted by Deutsche Bank and that the FDIC must indemnify JPMorgan “in full.”
“Any liability for failure to repurchase loans remains with the FDIC,” JPMorgan said.
The case reached an “important milestone” this month with a schedule being filed for expert arguments on the question of which would be liable, Nomura Securities International analysts Paul Nikodem and Pratik Gupta wrote in a report. The timeline could provide “one additional catalyst for JPMorgan to consider settling this case,” they said.
The Deutsche Bank case is Deutsche Bank National Trust Co. v. Federal Deposit Insurance Corp., 09-cv-01656, U.S. District Court, District of Columbia (Washington). The FHFA case is Federal Housing Finance Agency v. SG Americas, 11-cv-6203, Southern District of New York (Manhattan).