JPMorgan Takes FDIC To Court Over More Than A Billion In WaMu Losses


In an extremely rare occurrence of a banking group turning the tables on a financial regulator, JPMorgan Chase ( JPM ) filed a lawsuit against the Federal Deposit Insurance Corporation (FDIC) seeking compensation for losses "in excess of a billion dollars" which the diversified banking group incurred as a result of its acquisition of Washington Mutual (WaMu) at the peak of the economic downturn. The bank claims that the FDIC should shoulder a chunk of the losses Washington Mutual accrued due to its faulty practices prior to being acquired by JPMorgan, as the regulator was responsible for overseeing the liquidation of WaMu. After all, the FDIC was instrumental in brokering the JPMorgan-WaMu deal almost overnight in an attempt to provide the country's financial sector much-needed relief in late 2008.

Quite notably, the lawsuit comes roughly a month after the country's largest bank by assets settled all mortgage-related disputes with several regulatory watchdogs for a whopping $13 billion (see Key Takeaways From JPMorgan's Mammoth Settlement Of Legacy Mortgage Issues ). The overarching settlement included a point that JPMorgan will not pass on WaMu-related liabilities to the FDIC, and the bank claims that it does not intend to reverse that point.

We maintain our $60 price estimate for JPMorgan's shares , as the bank had already set aside the cash needed to cover this settlement in the third quarter.

See our full analysis of JPMorgan

JPMorgan and the FDIC have been at odds for five years now - since the collapse and subsequent acquisition of Washington Mutual by the former in late 2008. The short timeline within which the deal was finalized and executed did not allow the two parties to iron out the details of who is responsible for losses on faulty mortgage-backed securities originated by WaMu. The lack of clarity triggered the dispute within months of the deal, with events over the years exacerbating the situation.

The bank alleges that the FDIC assisted Fannie Mae & Freddie Mac in reaching a $1.1 billion settlement over WaMu's mortgage-backed securities, and this payout should be made by the regulator as it had reportedly indemnified JPMorgan against liabilities related to these securities at the time the WaMu deal was etched out. On the other hand, the FDIC maintains that JPMorgan inherited all these issues as part of the deal and that it should not be made liable for any losses.

Although this lawsuit is just one among a long list of lawsuits that the bank is currently facing from regulators around the globe, it stands out as being one in which the bank is not a defendant. JPMorgan has spent billions to put its legacy issues behind it, and is still not sure of the legal liabilities that the outstanding lawsuits entail. Given this, the FDIC lawsuit represents a possibility that in one instance the bank actually ends up receiving a sizable amount of cash from regulators as compensation.

In the event of a decision by the court in JPMorgan's favor, the bank will report a one-time improvement in margins for its investment banking business. As you can confirm by making changes to the chart below, this will have a negligible impact on JPMorgan's share value.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BAC , C , JPM , MS



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