In an extremely rare occurrence of a banking group turning the
tables on a financial regulator, JPMorgan Chase (
) 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
Key Takeaways From JPMorgan's Mammoth Settlement Of Legacy Mortgage
). 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
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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