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J.P. Morgan Wins Legal Battle in WaMu Case

wsj.com | June 4, 2015

By Emily Glazer and Patrick Fitzgerald

J.P. Morgan Chase & Co. won a legal battle in its effort to avoid billions of dollars in potential liabilities from its purchase of Washington Mutual Inc.’s banking operations during the financial crisis.

A U.S. District Court judge in Washington ruled Wednesday that the Federal Deposit Insurance Corp. must shoulder certain legal claims stemming from decisions that Washington Mutual made before J.P. Morgan bought the business in 2008 at the behest of regulators.

J.P. Morgan and the FDIC have fought for years over who is ultimately liable for claims that arose from the failed Seattle thrift. The bank has said the FDIC receivership that liquidated Washington Mutual in 2008 should pay any claims. The FDIC has countered that J.P. Morgan is responsible. J.P. Morgan bought the business for $1.88 billion during some of the most tumultuous hours of the financial crisis. Since then, J.P. Morgan has worked to settle a wide variety of mortgage-related litigation.

In 2013, it paid a $13 billion penalty to the Justice Department related to second mortgages. That payment isn’t affected by Wednesday’s ruling.

U.S. District Judge Rosemary M. Collyer’s decision, though, does make it more likely that the bank won’t ultimately be forced to pay on some other WaMu-related claims, a prospect that could come as a relief to the bank, which has paid out more than $26 billion in recent years related to various crisis-related legal suits and fines.

Wednesday’s decision focused on whether a suit Deutsche Bank National Trust Co. brought for roughly $10 billion on behalf of more than 100 trusts holding poorly performing bonds issued by WaMu would fall into the FDIC receivership, according to a person familiar with the case.

Some saw the decision as a setback for Washington Mutual bondholders, owed some $13 billon. That is because if the FDIC is ultimately on the hook for losses tied to soured WaMu mortgage loans, there may be being nothing left over for the bank’s bondholders.

The judge was “receptive to J.P. Morgan’s position,” said John McDonald, a bank analyst at Sanford C. Bernstein. He said the ruling makes it possible that J.P. Morgan could end up adding less money to legal reserves in the future, and the cost of litigation for the bank could slow.

Jasraj Vaidya, a director at Barclays focusing on commercial-mortgage securities and credit strategy, wrote in a note that the ruling means J.P. Morgan likely will only need to shoulder a “relatively small portion of the actual liabilities” in the WaMu matter.

The FDIC and other parties in the case can appeal. A spokesman for the FDIC declined to comment. In the past, the regulator has said that J.P. Morgan inherited problems from the WaMu deal, including mortgage bonds that are the subject of numerous lawsuits from investors.

A J.P. Morgan spokesman said the bank is pleased with the judge’s decision.

Judge Collyer said in her opinion that J.P. Morgan is responsible only for liabilities reflected in the book value on WaMu’s financial accounting records as of Sept. 25, 2008. In other words, since the Deutsche lawsuit was filed after the September 2008 failure of WaMu, the FDIC receivership is responsible for it, not J.P. Morgan.

The FDIC had previously argued that book value could include more than what was on the accounting records as of September 2008. But J.P. Morgan has other liabilities, including those related to a unit called Washington Mutual Mortgage Securities Corp., the judge ruled.

The receivership run by the FDIC isn’t made up of taxpayer dollars but contains money that would be divvied up among creditors, including J.P. Morgan and a number of hedge funds that bought debt as years passed.

J.P. Morgan has said in a previous lawsuit that the roughly $2.7 billion in assets in the receivership should be sufficient to cover everything from a settlement with mortgage-finance companies Fannie Mae and Freddie Mac to injuries sustained by a woman who slipped on a ceramic tile outside a Washington Mutual branch to millions in unpaid state taxes.

The FDIC has said previously that it didn’t reject all WaMu-related claims.

Deutsche Bank, as trustee for securitized pools of more than a half million home loans, in 2009 sued both the FDIC and J.P. Morgan. The bank has estimated mortgage-pool damages could run from $6.7 billion to $10.1 billion. J.P. Morgan, meanwhile, had previously estimated its repurchase liabilities at some $259 million, in court filings.

The full opinion was placed under seal and won’t be made available until later this month.

According to the Deutsche Bank suit, either the FDIC or J.P. Morgan should be held to account for losses in WaMu’s allegedly fraudulent or poorly underwritten home loans.

J.P. Morgan bought WaMu’s banking operations but said it left behind the liabilities at issue in the Deutsche Bank lawsuit. According to the FDIC, J.P. Morgan took on the liabilities attached to the mortgage loan-securitization trusts when it bought the WaMu operations.

The trusts involved in the lawsuit were the focus of an investigation by a Senate subcommittee, which disclosed that WaMu’s own internal reviews found that “loans marked as containing fraudulent information had nevertheless been securitized and sold to investors.”

The dispute is part of a broader battle over what exactly J.P. Morgan bought when it acquired the business as markets seized up and the world-wide financial system teetered on the brink of collapse in the fall of 2008.

Much of that fighting took place in bankruptcy court, where the WaMu parent company took refuge after being stripped of the thrift. As part of the chapter 11 case, WaMu’s former parent struck a deal with J.P. Morgan and with the FDIC over how to split up billions of dollars in cash and tax refunds, assets that were claimed by all three.

 

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