There is a saying: “don’t buy the hand that feeds you” but there is nothing in popular aphorism literature about suing the hand that bails you out. Which is precisely what JPM did overnight when it sued the Federal Deposit Insurance Company, claiming the agency was responsible for over $1 billion in liabilities assumed by the bank as part of its takeover of Washington Mutual in 2008. Of course, having been the subject of a relentless battery of lawsuits by every US agency imaginable, many were wondering when JPM would strike back, or rather if it would have the temerity to sue the same government that bailed it out with billions of direct injections and even more billions in FDIC-subsidized bond issuance. The answer is yes, and as JPMorgan alleged in the complaint, the FDIC agreed to shield it from liability from lawsuits claiming failures by Washington Mutual. JPMorgan said it took on only limited liabilities in its purchase of the Seattle-based bank’s assets. What next: Jamie Dimon sues the Fed for forcing it to acquire Bear Stearns’ assets at the firesale price of $2 $10 per share, in which the bank assumed Bear’s assets if not so much its liabilities – after all there was a government to bail it out for that.
“The FDIC’s indemnification obligations that are the subject of this action are a matter of contract,” the New York-based bank said in its complaint. “They are promises that the FDIC made to JPMC to induce JPMC” to buy Washington Mutual’s assets, it said.
Greg Hernandez, an FDIC spokesman, didn’t immediately return voice-mail and e-mail messages after regular business hours seeking comment on the bank’s allegations. Brian Marchiony, a JPMorgan spokesman, declined to comment on the case.
J.P. Morgan and the FDIC have squabbled over who must shoulder the burden for legal claims stemming from decisions Washington Mutual made before the deal. J.P. Morgan said the FDIC receivership that liquidated the failed thrift in 2008 should pay any claims. The FDIC has countered that J.P. Morgan is responsible.
The battle came to a head Tuesday when the New York bank alleged in its suit, filed in U.S. District Court in Washington, D.C., that the FDIC receivership hasn’t honored its obligations. J.P. Morgan is seeking a portion of the $2.7 billion remaining in the receivership, which includes $1.88 billion J.P. Morgan paid for Washington Mutual’s branches and deposits.
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The assets in the receivership should be “sufficient,” J.P. Morgan said in its lawsuit, to cover everything from a settlement with mortgage-finance companies Fannie Mae and Freddie Mac to injuries sustained by a woman who slipped on a ceramic tile outside a Washington Mutual branch to millions in unpaid state taxes. The FDIC has said previously that it didn’t reject all Washington Mutual-related claims.
J.P. Morgan said in its lawsuit filed Tuesday that the FDIC pledged in a 39-page purchase agreement to protect it from such liabilities. One key section of the agreement states the FDIC receivership “agrees to indemnify and hold harmless” J.P. Morgan for any liabilities of Washington Mutual that “are not assumed” by J.P. Morgan. In exchange, the bank said in its lawsuit Tuesday, J.P. Morgan “protected” the FDIC “from potentially unprecedented liability and helped ensure the stability of the country’s banking system.”
As a reminder, there wasn’t exactly a gun to JPM’s head when it was bidding for WaMu’s assets being offered in a sudden and dramatic firesale:
The fall of the Seattle thrift was the biggest commercial-banking failure in U.S. history, and it presented immediate benefits to J.P. Morgan, expanding its network across the U.S. for the first time. The FDIC chose J.P. Morgan’s bid over a competing offer from Citigroup Inc.
But while JPM was happy with purchasing WAMU’s assets at pennies on the dollar, it seems it had some reservations about the liabilities. As for JPM’s strategy, it is quite clear: divert attention from the possibility of even more billions in legal provisions.
J.P. Morgan reiterated in its lawsuit that it separately expects the FDIC receivership to cover any potential damages resulting from a private lawsuit brought by Deutsche Bank National Trust Co. seeking as much as $10 billion on behalf of more than 100 trusts holding poorly performing bonds issued by Washington Mutual. J.P. Morgan and the FDIC already have disagreed in that case over who ultimately is liable for those claims.
Will the US government – engaged in a push to “punish” banks for what has largely been a failure to govern and supervise effectively and thus also divert attention from its failings – settle with JPM, or will this merely enrage the Department of Justice and seek even more punitive damages (if no prison sentences – never prison sentences) from JPM management remains to be seen. One thing is certain: JPM’s lobby spending in the next year is set to break all records – after all politicians have made it quite clear they demand much moar from the Wall Street lobby.
Full JPM complaint below.
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/RrdRIiKXDV4/story01.htm Tyler Durden