Like a multi-billion dollar game of hot potato, JPMorgan Chase & Co. on Tuesday sued the Federal Deposit Insurance Corp., arguing that the bank regulator is on the hook for massive liabilities incurred by Washington Mutual Inc.
JPMorgan bought the failed bank for $1.9 billion in 2008 following an FDIC takeover. What's not clear is who got stuck with Washington Mutual's liabilities - the FDIC, the failed bank's receiver, or JPMorgan, its new owner?
It's not a new fight. The same question is currently being litigated in a $10 billion lawsuit brought by Deutsche Bank in 2009 against both entities over shoddy mortgage-backed securities sold by Washington Mutual.
The case comes down to a microscopic reading of the 39-page purchase and assumption agreement. In the Dec. 17 suit, which like the Deutsche Bank action was filed in U.S. District Court for the District of Columbia, JPMorgan argues that under the terms of the agreement, it “assumed only an expressly defined subset” of liabilities that were listed in Washington Mutual’s books at the time of the purchase. Everything else is the FDIC’s problem, according to the bank.
However, JPMorgan is not seeking reimbursement for payments connected to its recent $13 billion settlement with federal and state regulators for misconduct in the mortgage market—and indeed is barred from doing so under the terms of the deal.
Still, there are plenty of other Washington Mutual-related legal expenses that could be passed on to the FDIC if JPMorgan’s interpretation of the purchase agreement prevails—claims that are in addition to the $10 billion demanded by Deutsche Bank.
Represented by Sullivan & Cromwell partners Robert Sacks and Brent McIntosh, JPMorgan argues that the FDIC “broadly agreed to indemnify” it as a means of enticing it to buy Washington Mutual—the largest bank to fail in U.S. history. By doing so, JPMorgan “protected the FDIC from potentially unprecedented liability and helped ensure the stability of the country's banking system," Sacks wrote. He did not immediately respond to a request for comment.
Now, JPMorgan wants the FDIC pay it back for agreeing to repurchase (for an unspecified amount) Washington Mutual mortgages that were sold to Fannie Mae and Freddie Mac but didn’t live up to their representations and warranties. The bank also wants the FDIC to indemnify it for 20 suits brought by private purchasers of Washington Mutual’s residential mortgage backed securities. The suits allege that the offerings were misrepresented or failed to disclose material facts. Twelve of the suits have settled. JPMorgan also wants to be paid back for tax claims brought by 12 states and three cities, and for claims by Washington Mutual’s bondholders.
Then there are the little suits—a slip and fall at a branch in New York, a customer in California who claimed the bank wrongfully transferred her funds. The bank even wants reimbursement for complying with FDIC requests to provide documents for use in lawsuits and investigations by the FDIC-Receiver.
According to JPMorgan, the money won’t come from taxpayers, but rather from the $2.75 billion in assets held by the FDIC’s Washington Mutual receivership.
FDIC spokesman David Barr declined to comment on the litigation. But in the Deutsche Bank lawsuit, the regulator made it clear that it views its obligations under the purchase agreement much differently.
The FDIC “transferred all of [Washington Mutual’s] liabilities and obligations under the Governing Agreements” to JPMorgan, argued FDIC counsel William Stein, a partner at Hughes Hubbard & Reed, in court papers. “The assets were purchased subject to ‘all liabilities’ affecting those assets.”
As for JPMorgan's insistence that it's only on the hook for liabilities specifically listed in Washington Mutual's ledgers, Stein wrote that "there is no reasonable basis to interpret the word 'liabilities' narrowly to mean only those liabilities that have become sufficiently concrete to warrant recording as specific line item amounts."
Further, JPMorgan got a great deal, the FDIC argues, paying $1.9 billion for a bank with assets of nearly $12 billion. “Despite its extraordinary gain and continuing profits, [JPMorgan] now seeks to walk away from the associated obligations and liabilities by denying the plain meaning” of the purchase and assumption agreement.
Figuring out who has to pay for what is not an easy call. U.S. District Judge Rosemary Collyer in 2011 ruled it was premature to dismiss either JPMorgan or the FDIC from the Deutsche Bank suit.
The case is now in discovery, with experts focused specifically on the meaning of the purchase agreement. "One of the basic questions," Collyer wrote, is whether the bank's purchase and assumption agreement "left these alleged liabilities with the FDIC or transferred them" to JPMorgan.