JPMorgan Sues FDIC for $2.75B in WaMu Receivership Assets

Updated from 11:05 a.m. ET with closing share prices and additional information throughout.

NEW YORK (TheStreet) -- In a sweeping $13 billion November settlement with JPMorgan Chase  (JPM) over shoddy mortgage bond sales, the government left open the bank's ability to sue the Federal Deposit Insurance Corporation regarding some of the liabilities it took on when buying Washington Mutual out of receivership in 2008. Now the Jamie Dimon-run bank is doing just that.

JPMorgan said in a court filing late on Tuesday it would sue the FDIC for an indemnification of over $1 billion in liabilities the bank now faces after buying WaMu out of receivership at the depths of the 2008 financial crisis. The lawsuit continues a long-running standoff between JPMorgan and the FDIC over the sale of WaMu out of receivership.

When JPMorgan acquired WaMu out of the FDIC's receivership for $1.9 billion, the bank contends that it was indemnified from much of the legal liabilities of the failed thrift. The FDIC, however, has remained adamant that JPMorgan knew it was responsible for WaMu's assets and liabilities.

"The FDIC's indemnification obligations that are the subject of this action are a matter of contract," JPMorgan said in a complaint filed on Tuesday. JPMorgan also said in its complaint the FDIC had promised not to shift WaMu's legal liabilities onto the bank as a means to induce a merger.

"[The] FDIC-Receiver has wrongly refused to acknowledge or honor its expansive indemnification obligations to JPMC under the P&A Agreement and in doing so has subjected JPMC to massive liability," the bank added.

JPMorgan's Tuesday lawsuit comes on the heels of the $13 billion settlement between the bank and a host of federal and state regulators that some might have expected would put issues surrounding the WaMu receivership to rest.

In fact, JPMorgan agreed not to put any of the $13 billion in legal claims to the WaMu receivership. However, the settlement did not preclude JPM from challenging the FDIC on WaMU legal liabilities, generally private label mortgage-backed securities that weren't guaranteed by Fannie Mae (FNMA) or Freddie Mac (FMCC). 

On a conference call with analysts following the Nov. 20 settlement, JPMorgan CFO Marianne Lake indicated the bank would continue to challenge the FDIC over WaMu-related liabilities and their indemnification.

"[This] settlement does not resolve claims on trusts issued by Washington Mutual. We continue to believe that WaMu repurchase liabilities remained with the FDIC, and litigation on this matter is continuing," Lake said.

Joshua Rosner, a banking analyst at Graham Fisher & Co., said in a Wednesday telephone interview that JPMorgan may ultimately be attempting to put the FDIC's insurance fund on the hook to cover WaMu-related liabilities. That is because the $2.7 billion in claims JPMorgan is suing over could exceed the WaMu receivership's assets, potentially exposing the FDIC and its insurance fund to losses.

Rosner noted that WaMu's putback obligations on mortgage securities the bank sold to government agencies and private investors were referenced in the bank's public filings prior to JPMorgan's acquisition. The analyst added that JPMorgan filed suit against the FDIC's corporate entity in count four of its Tuesday lawsuit.

"It undermines the credibility of the FDIC as a receiver," Rosner said. He has criticized JPMorgan's reluctance to assume all of WaMu's liabilities.

"JPMC understands the assets of the [Washington Mutual] receivership are currently about $2.75 billion. Those assets should be sufficient to satisfy JPMC's indemnification claims that are the subject of this action in light of the amounts that JPMC has paid to date," JPMorgan said in its Tuesday lawsuit.

The FDIC declined to comment citing a strict policy not to say anything about pending litigation.

JPMorgan CEO Jamie Dimon indicated in November the bank would fight the FDIC, even if legal battles stretched for years.

"So we have the right to go against the receiver. Now, keep in mind, the FDIC and the receiver are two different things. Whatever remains in the receivership, which has a lot of cash, will be paid out to bondholders, which happens to mostly be hedge funds at this point. We have the full right on all WaMu, which includes the Deutsche Bank thing, to go after the receiver reps and warranties, and we intend to do it. But we're very patient," Dimon said.

It appears JPMorgan's patience ran out sometime in December.

JPMorgan has been challenged by investors, analysts and the media on whether the bank has benefitted from crisis time acquisitions of investment bank Bear Stearns and Washington Mutual.

At an investor conference earlier in December, Dimon said that JPMorgan would not take the "unlimited risk" of another Bear Stearns deal. He indicated that legal issues with the FDIC are the only issue clouding the bank's acquisition of WaMu.

"So you still might have done a WaMu," Dimon said of the acquisition. "The part of WaMu that we had a hard time with is that we were forced to give up some of the indemnities we got when we negotiated to buy WaMu. So if you're going to be buying a bank from the FDIC, you've got to say, what are those indemnities worth if another arm of the government can tell you, you've got to give them up? And so I don't know it would happen if we were doing WaMu again and I don't know how you can make that airtight."


JPMorgan shares rose nearly 3% in Wednesday trading, closing at $57.24, within reach of a 10-year share price high on the Federal Reserve's decision to taper its mortgage bond purchases by $10 billion-a-month. Shares in the nation's largest bank by assets have gained over 30% year-to-date.

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-- Written by Antoine Gara in New York.

Follow @antoinegara