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JPMorgan Sues FDIC over WaMu Claims

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JPMorgan Chase & Co. (JPM - Free Report) has sued the Federal Deposit Insurance Corp. (FDIC) for failure to assume legal liabilities arising from the bank’s acquisition of Washington Mutual Inc.’s (WaMu) asset in 2008. The company filed the case in the U.S. District Court for the District of Columbia and claimed more than $1 billion.

JPMorgan alleged that the FDIC erroneously declined to acknowledge or honor its indemnification obligations pertaining to WaMu. The company claimed that the FDIC had agreed to protect the bank from legal liability claims, as per the terms of deal to acquire WaMu.

WaMu sold risky mortgage-based securities (MBS) prior to the financial crisis. After its acquisition by JPMorgan, all legal problems related to the sale of MBS fell on the bank. However, the company asserts that it assumed only limited liability in its acquisition of WaMu’s assets.

Hence, JPMorgan argues 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 continues to oppose this and claims that the bank had taken over WaMu’s legal accountabilities as well.

Additionally, JPMorgan stated that it should be compensated for settlement of several lawsuits filed against WaMu, which claimed that investors were misled as regards the quality of underlying loans during the sale of MBS.  Further, the company believes that it is entitled to reimbursement for the settlement amount paid to Fannie Mae and Freddie Mac related to the sale of bad loans by WaMu.

Nevertheless, the suit does not seek to reverse the terms of JPMorgan’s recent $13 billion settlement deal with the Department of Justice.

Though many might favor the FDIC in this case, JPMorgan should actually be shielded from legal liabilities arising from WaMu’s conduct prior to the financial crisis. In reality, the company protected the FDIC from significant liability due to the failure of WaMu and to an extent, even prevented the country’s financial system from collapse.

If JPMorgan is prosecuted, this will discourage other firms from acquiring failed banks and eventually the burden will fall on the taxpayers’ money.

Currently, JPMorgan carries a Zacks Rank #4 (Sell). A better-ranked stock worth considering is Comerica Incorporated (CMA - Free Report) with a Zacks Rank #2 (Buy).

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