As JPMorgan Chase & Co. hammers out a $13 billion settlement with the government, the bank has more to worry about than paying Uncle Sam and consumers. Any settlement would also have direct repercussions in a $10 billion lawsuit Deutsche Bank National Trust Co. has filed over shoddy assets.
For JPMorgan, one challenge is to finesse a deal with the feds without assuming liability in the Deutsche Bank suit, pending in U.S. District Court for the District of Columbia.
“If JPMorgan accepts liability on the government claims … it would become very difficult for them to argue that they don’t have liability on the Deutsche Bank claims,” said Joshua Rosner, an analyst at the research consultancy Graham Fisher & Co. who is following the case closely.
The German bank claims it’s owed billions of dollars for its purchase of faulty mortgage-backed securities from Washington Mutual Inc., whose collapse in 2008 was the country’s biggest-ever bank failure. JPMorgan acquired Washington Mutual for $1.9 billion in an auction the Federal Deposit Insurance Corp. (FDIC) organized.
What’s not clear is whether JPMorgan assumed liability for Washington Mut­ual’s shoddy securities, or whether the company’s lawyers used finely tuned contract language to stick that obligation with the FDIC, which acted as the failed bank’s receiver.
Deutsche Bank has sued both JPMorgan and the FDIC. Now, U.S. District Judge Rosemary Collyer must decide who is liable. Appointed to the bench in 2003, Collyer has experience with high-stakes financial cases. In 2012, she oversaw the $26 billion foreclosure-abuse settlement between the nation’s largest mortgage lenders and state attorneys general.Collyer in 2011 ruled it would be “improvident and premature” to let either JPMorgan or the FDIC off the hook yet. “One of the basic questions,” the judge wrote, is whether the bank’s purchase and assumption agreement “left these alleged liabilities with the FDIC or transferred them” to JPMorgan. In discovery, the lawyers are parsing the meaning of that agreement.
In large part, the Deutsche Bank case comes down to a close look at the work of three JPMorgan lawyers — top in-house attorneys Daniel Cooney and Michael Lipsitz, and outside counsel Mitchell Eitel, the co-leader of Sullivan & Cromwell’s financial institutions group — who allegedly took the lead in crafting the 39-page Washington Mutual purchase and assumption agreement.
Eitel did not respond to a request for comment and FDIC spokesman David Barr declined to comment. Boies, Schiller & Flexner partner Tanya Chutkan, who represents Deutsche Bank, referred a call for comment to the bank. A Deutsche Bank spokeswoman declined to comment.
JPMorgan faces an array of legal problems stemming from the sale of mortgage-backed securities to Fannie Mae, Freddie Mac and other investors who allege that it misrepresented the quality of the underlying loans. Some of the securities originated with Washington Mutual, some with Bear Stearns Cos. Inc. and others with JPMorgan itself. (To cover “escalating demands and penalties from multiple government agencies,” the bank said on Oct. 11 that it had set aside $23 billion for litigation costs.)
The JPMorgan deal with federal and state authorities over mortgage-backed securities is tentative. “Indications are that there will be a combined payment somewhere in the neighborhood of $13 billion to the government arising out of the alleged misconduct surrounding the issuance of mortgage-backed securities by JPMorgan and its subsidiaries from 2005 to 2007,” said Darren Robbins, a name partner at Robbins Geller Rudman & Dowd who represents shareholders suing JPMorgan. The bank also could end up paying $5 billion or $6 billion to certain private investors, Robbins said, “further confirmation of the seriousness of the alleged wrongdoing surrounding the packaging, marketing and sale of mortgage-backed securities by JPMorgan.”
‘NOT A FINE’
About $4 billion of the settlement with the U.S. Justice Department and state agencies would resolve a suit by the Federal Housing Finance Agency. A person familiar with the negotiations said the payment is “a resolution in lieu of damages. … It’s not a fine. It’s not a penalty. It is part of the umbrella of issues being resolved.”
Such ambiguous language may make it possible for JPMorgan to settle with the government but still pin liability for Deutsche Bank’s claims on the FDIC.
Deutsche Bank served as trustee for 127 trusts that bought about 500,000 mortgages from Washington Mutual. The trusts lost $134 billion in value, plummeting from $165 billion to $34 billion, according to the suit.
Under the terms of the purchases, Washington Mutual was supposed to buy back the mortgages if the loans didn’t meet the standards described in their warranties. Now, Deutsche Bank wants a $10 billion refund from Washington Mutual’s successor, whoever that might be.
JPMorgan lawyer Brent McIntosh, a partner at Sullivan & Crom­well, wrote in court papers that, under the purchase agreement, JPMorgan “assumed only specified liabilities: those that had been reduced to a dollar amount on [Wash­ington's] ‘general ledger and subsidiary ledgers.’ ” The purchase agreement “ carefully defines the ‘where’ and the ‘when’ of the liabilities JPMC assumed,” he said, and Deutsche Bank’s claims are not among them.
The FDIC’s lawyers, represented by a team from Hughes Hubbard & Reed’s Washington office, said the agency “admits that there is a justiciable controversy” over who is liable.
Under the purchase agreement, JPMorgan acquired “all mortgage servicing rights and obligations … and related contracts” from Washington Mutual. The FDIC said these “related contracts” include the obligation to repurchase faulty loans like those of Deutsche Bank.
As for JPMorgan’s insistence that it’s only on the hook for liabilities specifically listed in Washington Mutual’s ledgers, FDIC counsel William Stein, a partner at Hughes Hubbard, wrote that “there is no reasonable basis to interpret the word ‘liabilities’ narrowly to mean only those liabilities that have become sufficiently concrete to warrant recording as specific line item amounts.”
As Collyer considers who ultimately will be held liable — a schedule takes the case through June 2014 — another fight has emerged: whether certain lawyers should be compelled to testify. JPMorgan has resisted, claiming attorney-client privilege. The company submitted a 2,500-page privilege log — “longer than the three-volume ‘Decline and Fall of the Roman Empire,’ ” said Hughes Hubbard’s Scott Christensen, according to a court transcript.
“If the parties can’t ask the lawyers who negotiated the deal what their clients were thinking … we are going to be hamstrung in discovery,” Christensen said last year. Collyer has backed some privilege claims. It “gets extraordinarily murky, she said earlier this year, “about whether the lawyer is actually providing legal advice or business advice.”
Jenna Greene can be contacted at email@example.com. Matthew Huisman contributed to this report.