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Did Dimon Breach WaMu Agreement?

Senior writer Dan Freed follows up on questions raised by an internal JPMorgan e-mail from June 2008 and makes a few interesting discoveries.
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) -- After I reported last week on an

internal JPMorgan Chase (JPM) - Get JPMorgan Chase & Co. Report e-mail message

describing in detail a chat between JPMorgan Chairman and CEO Jamie Dimon and

Banco Santander


Chairman Emilio Botin, a few readers contacted me to share their view that the e-mail shows Dimon breached a confidentiality agreement related to

Washington Mutual


I have looked into their argument and, while I don't see proof of their claim, the search has been interesting, so I thought I'd share what I found.

There was indeed a confidentiality agreement signed on March 11, 2008 between JPMorgan and Washington Mutual, according to James Roquemore, an attorney with

Greer, Herz & Adams

which is representing Washington Mutual shareholders and bondholders in a class action lawsuit against JPMorgan.

Roquemore says he cannot send me copy of the agreement because JPMorgan filed it under seal. However, he did send me a memo from the board of the

Federal Deposit Insurance Corp.

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approving JPMorgan's acquisition of Washington Mutual that appears to support the existence of the confidentiality agreement. Greer, Herz & Adams obtained the memo through a Freedom of Information Act request, though parts of it were withheld.

The final page of the memo refers to the March 11, 2008 confidentiality agreement between the two banks and indicates the FDIC indemnified JPMorgan against up to $500 million worth of litigation "it may sustain" for violating it.

You can read the memo


Roquemore argues the FDIC did not have the authority to indemnify JPMorgan "against its own misconduct."

On the face of it, Roquemore's argument makes sense to me. It is understandable that the FDIC would be able to protect JPMorgan against a lawsuit from a WaMu depositor who argued he never agreed to hand his deposits over to JPMorgan. But what legitimate reason would JPMorgan have for needing to breach a confidentiality agreement?

Former FDIC Chairman Bill Isaac came up with a good reason, however. After making various disclaimers (he hasn't practiced law for years; he doesn't have all the facts; he hasn't been following this issue) he guesses that JPMorgan is seeking indemnification because the agreement likely prevented the bank from attempting a hostile takeover of WaMu.

"It would be a mistake to underestimate the FDIC's broad authority in putting together bank failure transactions," Isaac wrote me via e-mail. "From the FDIC's perspective, the JPMorgan Chase deal was likely vastly superior cost-wise than whatever other deals were on the table. If, for example, the JPMorgan Chase deal was estimated to beat the next best deal by $3 billion, the FDIC could reasonably take on a contingent $500 million of exposure to gain a certain $3 billion."

Isaac continued: "It doesn't have to be seen as protecting JPMorgan Chase from its own behavior. JPMorgan Chase probably said, 'We think we can beat any claim that we breached the contract, but if we lose we want the FDIC to sweeten our deal to cover that cost, up to a cap of $500 million. You (the FDIC) are the big winner even if you have to cover the cost of such a claim.'"

I don't know Isaac, but from what I can tell by searching the Internet for recent statements he's made, he does not appear be shy about speaking his mind, and he does not appear to be in deeply in hock to either to either JPMorgan or the FDIC. If anything, all his disclaimers seem to only enhance his credibility. As a former FDIC Chairman, I'd say Isaac is on pretty solid ground opining on this case, at least for our purposes here.

"I don't think it is likely that a court would refuse to enforce this agreement between JPMorgan Chase and the FDIC," he concludes in his email to me.

Putting aside the question of whether the FDIC can indemnify JPMorgan against breaching a confidentiality agreement, there is also the question of whether it was breached in the first place. The e-mail describing the talk between Dimon and Botin doesn't give many specifics, a fact that Andrew Mytelka, the lead attorney for Greer, Herz in the lawsuit, acknowledges.

"I can't tell you exactly what their conversation was and whether that violated

the agreement or not," Mytelka told me.

So there you have it. Lots of interesting questions, and that email describing the meeting between Dimon and Botin is a fascinating peek behind the curtain that will be of interest to everyone from followers of


(C) - Get Citigroup Inc. Report


General Electric

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, to European and Chinese banking, to big U.S. regionals like

PNC Financial

(PNC) - Get PNC Financial Services Group, Inc. Report



(STI) - Get SunTrust Banks, Inc. Report

. You can read it by clicking


. But even the attorney suing JPMorgan admits he doesn't have enough to prove the agreement was breached by Dimon or anyone else at JPMorgan. At least not yet.

Representatives for JPMorgan and the FDIC declined comment for this story.


Written by Dan Freed in New York