JPMorgan’s Tentative $13B Deal Said to Hit FDIC Fund Snag


JPMorgan Chase’s tentative agreement to pay a record $13 billion to end civil claims over its sales of mortgage bonds has hit a snag because of the bank’s bid to make the Federal Deposit Insurance Corp. liable for part of the payment, a person familiar with the talks said.

The U.S. Justice Department is opposing JPMorgan’s request that the FDIC assume liability for investors’ losses stemming from Washington Mutual Inc., the person, who sought anonymity to discuss the private negotiations, said today. JPMorgan acquired Washington Mutual’s assets in 2008.

The tentative agreement was described last weekend by two people with knowledge of the situation. It would mark the largest amount paid by a financial firm in a settlement with the U.S. The payment would amount to more than half of JPMorgan’s profit last year. Only seven companies in the Dow Jones Industrial Average earned more than $13 billion in 2012, according to data compiled by Bloomberg.

JPMorgan CEO Jamie Dimon is seeking to settle multiple civil claims that the company misrepresented the quality of mortgage-bonds that were packaged and sold at the height of the U.S. housing boom by JPMorgan, Washington Mutual and Bear Stearns Cos., which also was acquired by the New York-based bank in 2008.

Of the tentative settlement, $4 billion is being worked out between JPMorgan and the Federal Housing Finance Agency over claims related to mortgage bonds the bank and its affiliates sold to Fannie Mae and Freddie Mac.

The FHFA’s share of the agreement, thus far, would allow JPMorgan to seek FDIC reimbursement for losses related to Washington Mutual, according to the person who spoke anonymously. The bank is asking the Justice Department to accept the same terms, the person said.

Brian Marchiony, a spokesman for JPMorgan, and Andrew Gray, a spokesman for the FDIC, declined to comment on the snag in the talks.

The settlement would include about $3 billion for states and federal regulators, two people briefed on the matter said earlier this week. It also would cover a $2 billion penalty against the bank, and $4 billion for FHFA, the conservator for Fannie Mae and Freddie Mac, the bailed-out mortgage finance companies. About $4 billion would go to help homeowners in hard-hit metropolitan areas, said the people, who asked not to be identified because the negotiations aren’t public.

A settlement including funds from JPMorgan to pay investors in Washington Mutual mortgage securities “could be seen as setting a negative precedent” for the bank as it seeks to have the FDIC cover WaMu’s liabilities in private suits on behalf of bondholders, Barclays Plc analysts including Sandeep Bordia and Jasraj Vaidya wrote in a report.

Deutsche Bank AG, as a mortgage-bond trustee, filed a suit in 2010 saying either JPMorgan or the FDIC owed $6 billion to $10 billion for flawed mortgages in WaMu securities. JPMorgan has argued its purchase of WaMu assets in 2008 was structured in a way in which it shouldn’t liable. The FDIC has said the bank is responsible.

JPMorgan said in a November 2010 court filing in the lawsuit that it “never assumed any liability” for the claims asserted by Deutsche Bank and that the FDIC must indemnify JPMorgan “in full.”

“Any liability for failure to repurchase loans remains with the FDIC,” JPMorgan said.

The case reached an “important milestone” this month with a schedule being filed for expert arguments on the question of which would be liable, Nomura Securities International analysts Paul Nikodem and Pratik Gupta wrote in a report. The timeline could provide “one additional catalyst for JPMorgan to consider settling this case,” they said.

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