JPMorgan Still Isn't Sure What It Bought in 2008
By Matt Levine Oct 28, 2013 7:36 PM GMT+0100
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You may have heard that JPMorgan Chase & Co. is paying a lot of people billions of dollars to settle those people's lawsuits over bad mortgages that Washington Mutual sold them back in the day. Some people think that this is unfair to JPMorgan, since it wasn't selling the bad mortgages,* WaMu was. Why should JPMorgan pay for the sins of WaMu?
Well, because it bought WaMu, is the reasonable answer. When you buy a company you assume its liabilities. "There are always uncertainties in deals," notorious bank-hater Jamie Dimon once said. “Our eyes are not closed on this one.” This one being WaMu.**
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But here is a bonkers story about how, in certain rooms, JPMorgan is saying something else: That it assumed only certain specific liabilities of Washington Mutual, and only for the dollar amounts that WaMu had on its books. Your $1,385.41 checking account? Fine, they'll take it. Your large but uncertain lawsuit over fraudulent mortgage bonds? Nope, that's the Federal Deposit Insurance Corporation's problem: JPMorgan bought WaMu out from an FDIC receivership, and it didn't explicitly agree to take over those liabilities, so they stay with the FDIC. And if someone sues over those mortgages -- and someone has! -- and if JPMorgan settles those lawsuits -- and it plans to! -- then it's going to go sue the FDIC for its money back.
This theory is blazingly nuts, but here we are. I mean, I'm not your lawyer, nor am I JPMorgan's lawyer, and I guess its actual lawyers are pretty good. Still, my money is on nuts.
For more on why, turn to the place where boring things go.*** Up here, just imagine that JPMorgan was right: It got all the upside on WaMu's business, but no downside -- the FDIC indemnified it for every bad thing that might have been hidden in WaMu; JPMorgan was only on the hook for deposits and so forth at their stated amounts. There were no uncertainties in the deal. Does that sound like something that could possibly have happened? Even in 2008, when regulators loved JPMorgan?
If that were right, it would make the WaMu deal a fairly astounding gift to JPMorgan. But it's not right, surely. You can tell because, among many other things, JPMorgan wrote down WaMu's assets and took litigation reserves and explained to shareholders that there would be liabilities and uncertainties associated with WaMu. But that makes this story even weirder. The story is that JPMorgan's big settlement with the Justice Department is being held up over this point: JPMorgan wants to retain the right to seek reimbursement from the FDIC for the amounts it has to pay on WaMu loans, while the Justice Department wants it to give up that dream.**** JPMorgan is trying to wrap up all the government's lawsuits against it, yes, but not at the cost of wrapping up its (somewhat implausible) lawsuits against the government. It wants to keep those open. Those are more fun.
What is going on here? I don't know. Like I said, I found this story bonkers, because I read it and was like, "Wait, JPMorgan is really going to sue one part of the government to try to make it repay the settlement it paid to the other part of the government? That seems like a good idea? To whom?" It seems like a good instance of lawyers litigating for the fun of it, to their client's detriment. Surely a sensible business strategy would involve settling everything and moving on, not enraging everyone by settling and then suing to get the settlement money back.
But then I remembered how boring this JPMorgan settlement stuff is. Very boring, is how boring. Who can keep track of its intricacies? When JPMorgan sues the FDIC, who will remember to be enraged? It's just one more in an endless web of JPMorgan mortgage lawsuits. If JPMorgan calculates that its litigation stamina can outlast public and regulatory interest in being outraged at JPMorgan, then it might as well try to get its money back.
* I mean, separately, JPMorgan was probably selling other bad mortgages, things were a mess. But here we're only talking about the WaMu mortgages. Not even the Bear Stearns ones. There were a bunch of those too.
** I was led to that quote from this Peter Eavis post on the subject, which I in turn found through this Felix Salmon post; both recommended.
*** JPMorgan bought WaMu from the FDIC pursuant to a Purchase and Assumption Agreement, section 2.1 of which provided that JPMorgan "expressly assumes at Book Value … all of the liabilities of the Failed Bank which are reflected on the Books and Records" of WaMu as of the time the FDIC seized it in September 2008, including deposits and so forth (but explicitly excluding unsecured debt). From this JPMorgan spins a theory that goes like so:
There is no bona fide dispute that the FDIC retained all liabilities of the failed bank except those that had a “Book Value” as of September 25, 2008, when WMB was closed. Book Value is defined in the P&A Agreement as “the dollar amount [of an assumed liability] stated on the Accounting Records of the Failed Bank,” and “Accounting Records” are specifically defined as limited to “the general ledger and subsidiary ledgers and supporting schedules which support the general ledger balances.”
Okay then! The FDIC says that JPMorgan's "position is not consistent with the contractual language, common sense, or JPMC’s own public filings." I'll buy that. The "reflected on the Books and Records" language is designed to exclude liability for secret dealings by a failed bank, not legitimate claims on contracts that JPMorgan actually assumed.
If you believe JPMorgan's theory, then JPMorgan was on the hook only for the actual debts that were expressly stated on WaMu's books, at their stated amounts, which sort of defeats the purpose of having JPMorgan take over the failed bank: It would give JPMorgan all of the upside of WaMu, while sticking the FDIC with all of the downside. And that would make it odd that JPMorgan then wrote down WaMu's assets by something like $36 billion in part to reflect future liabilities. And that JPMorgan said in public filings that it would be on the hook for "repurchase and/or indemnity obligations arising in connection with the sale and securitization of loans" by WaMu. (That's page S-7 of this prospectus, which the FDIC cites.)
See also this MoneyBeat post by Francesco Guerrera on the FDIC dispute. Guerrera is more evenhanded than I am and concludes that "it is apparent that there is no clear-cut answer on whether J.P. Morgan inherited these mortgage liabilities." To which I say: nuts!
**** The settlement with the Federal Housing Finance Agency announced last week implicitly lets JPMorgan come after the FDIC receivership for WaMu, though not the FDIC "in its corporate capacity," for WaMu-related amounts. I mean, I'm with the Justice Department in that I don't think JPMorgan should do that, but I sympathize with the FHFA letting them. "Well, they're not going to win," would be a reasonable thought. |
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