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JPMorgan Ends WaMu Disputes with FDIC and Deutsche Bank

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Closing the doors on yet another matter pertaining to its acquisition of Washington Mutual Inc.’s (“WaMu”) banking business during the height of the 2008 financial crisis, JPMorgan Chase & Co. (JPM - Free Report) announced the ending of dispute with the Federal Deposit Insurance Corporation ("FDIC") and Deutsche Bank AG (DB - Free Report) . Per a regulatory filing, following the court approval, the company will receive $645 million as part of the deal.

Legal Burden Eases for JPMorgan

As part of the settlement deal, JPMorgan will drop its claims of $1 billion against the FDIC related to the WaMu purchase. Also, the settlement will end four other lawsuits to which JPMorgan and the FDIC are parties.

Further, the agreement allows JPMorgan to avoid nearly $6 billion in legal liabilities related to Deutsche Bank case. Deutsche Bank was the trustee to 99 trusts holding residential mortgage backed securities underlying WaMu home loans. Now, the FDIC will allow Deutsche Bank to have a claim against the estate.

Root Cause: Failure of FDIC to Assume WaMu’s Legal Liability

It all started in 2008, when JPMorgan acquired WaMu. Prior to the financial crisis, WaMu had sold risky mortgage-backed securities (MBS). After its acquisition by JPMorgan, all legal problems related to the sale of MBS fell on the bank.

Therefore, in 2013, JPMorgan sued the FDIC for failure to assume WaMu’s legal liabilities and sought more than $1 billion. The company had alleged that the FDIC wrongly declined to acknowledge or honor its indemnification obligations pertaining to WaMu.

JPMorgan claimed that the FDIC had agreed to protect the bank from legal liability claims, per the terms of deal to acquire WaMu. Also, the company asserted that it assumed only limited liability in its acquisition of WaMu’s assets.

Hence, JPMorgan argued that it is not liable in the cases that have been filed against it by various institutional investors and even the U.S. government for misrepresentation of the facts while selling MBS. However, the FDIC opposed this and claimed that the bank had taken over WaMu’s legal accountabilities as well.

Additionally in 2009, Deutsche Bank had filed a $10 billion case against the FDIC and JPMorgan over losses related to alleged flaws in WaMu's mortgage underwriting.

A Victory for JPMorgan

With the end of this major lawsuit, we can easily conclude that it is a victory for JPMorgan and similar other banks who acquired failed financial firms during the 2008 financial crisis. A company should be protected from significant legal liabilities arising from the failure of collapsed entity to properly manage business.

In case JPMorgan had lost the case, it would have discouraged other firms from acquiring failed banks, eventually shifting the burden to the taxpayers’ money.

Currently, JPMorgan carries a Zacks Rank #3 (Hold). Some better-ranked banking stocks include Comerica Incorporated (CMA - Free Report) and Hancock Holding Company . Both these stocks hold a Zacks Rank #2 (Buy).

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