J.P. Morgan, FDIC tangle over responsibility for WaMu liabilities
Wednesday, November 10, 2010; 9:06 PM
Federal regulators and J.P. Morgan Chase - which together managed the collapse of Washington Mutual during the frenzied days of the financial crisis - are embroiled in a fight over who should cover billions of dollars from a legal mess that the failed Seattle thrift left behind.
The 2008 implosion of WaMu, as it's commonly known, was the biggest banking failure in U.S. history, prompting the Federal Deposit Insurance Corp. to take over the firm and then orchestrate a shotgun deal for J.P. Morgan to buy the bank for a paltry $1.9 billion.
But the paperwork for the merger was written so hastily over a 48-hour period that it left ambiguous who should cover the cost of WaMu's liabilities.
J.P. Morgan points the finger at the FDIC, saying that it agreed only to take on bank liabilities that were spelled out on WaMu's books during the handoff. The lawsuits weren't, hence, J.P. Morgan has said it is off the hook, according to legal filings.
The FDIC has said J.P. Morgan agreed to buy the bank, both the good and the bad.
The dispute is another reminder of the continuing fallout from the extraordinary - and very rushed - steps taken by the federal government to shore up the financial system as it was teetering on collapse. Decisions were made quickly, and the paperwork sealing massive mergers was signed without spelling out every consequence.
Ultimately, taxpayers could bear the brunt of those hasty actions. Experts say the law may indeed favor J.P. Morgan.
"J.P. Morgan has a very good shot of taking back a substantial portion of the $1.9 billion it paid for WaMu, even after having reaped what I think is a windfall," said Kevin Starke, an analyst with CRT Capital Group.
WaMu is being sued by large investors who say the banking giant sold securities full of mortgages but misrepresented how risky they were.
The representative of these investors, Deutsche Bank National Trust, has not singled out which of WaMu's past owners should pay up. It instead filed suit against both the FDIC and J.P. Morgan claiming $6 billion to $10 billion in damages for violating contracts.
J.P. Morgan officials declined to comment on the matter. But in the bank's third-quarter financial filings this week, it said "such repurchase obligations remain with the FDIC receivership."
The FDIC has filed a motion for a judge to dismiss Deutsche Bank's suit, stating it was not liable to Deutsche Bank and that J.P. Morgan "expressly assumed" liabilities of the company. A spokesman for the FDIC declined to comment.