Exclusive: JPMorgan settlement complicated by Washington Mutual - sources

Reuters
JP Morgan Chase & Co sign outside headquarters in New York
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A sign outside the headquarters of JP Morgan Chase & Co in New York, September 19, 2013. REUTERS/Mike Segar

By Karen Freifeld and Emily Flitter

NEW YORK (Reuters) - JPMorgan Chase & Co's possible $11 billion settlement of government mortgage probes has been complicated by a dispute with the Federal Deposit Insurance Corp over responsibility for losses at the former Washington Mutual Inc, said people familiar with the matter.

The dispute, between the largest U.S. bank and the FDIC, could leave the federal agency on the hook for billions the bank is expected to pay as part of the settlement and substantially reduce the amount of the penalty JPMorgan actually pays to the government, some analysts said.

JPMorgan is seeking a "global" settlement of federal and state mortgage-related probes that could involve a payment of $7 billion in cash plus $4 billion for consumers, according to other people familiar with negotiations.

Last week, Chief Executive Jamie Dimon met with U.S. Attorney General Eric Holder to discuss a possible global settlement, and a source said the broad outlines could be reached any day. JPMorgan is also in talks with the U.S. Securities and Exchange Commission, the U.S. Department of Housing and Urban Development and the New York Attorney General's office.

JPMorgan, which acquired Washington Mutual from the FDIC for $1.9 billion at the height of the financial crisis, has disputed its responsibility to cover losses incurred by investors on the failed thrift's mortgage securities.

The bank has said in corporate filings and court proceedings in recent years that its liability is limited when it comes to reimbursing investors who lost money on Washington Mutual mortgage-backed securities.

The FDIC is disputing the matter in court.

Some fear the FDIC, under pressure from the Justice Department to join a global settlement, might agree to assume liability, a move that would effectively force another government agency to absorb billions of dollars in losses.

Spokesmen for both JPMorgan Chase and the FDIC declined comment. A Justice Department spokeswoman was not immediately available for comment.

"If the FDIC were to indemnify JPM as part of the government deal, it would likely reduce the rumored $11 billion by about $3.5 billion," said Joshua Rosner, managing director of Graham Fisher, an independent research consultancy. "That would be an absurd outcome."

An indemnification, Rosner said, would put JPMorgan's losses back on the FDIC, five years' after JPMorgan and the FDIC claimed that the transaction came at no cost to the FDIC.

Rosner estimates that an indemnification deal for JPMorgan would force the FDIC to assume $3.5 billion in claims against JPMorgan by the Federal Housing Finance Agency over Washington Mutual mortgage securities. Sources have said the FHFA claims against Washington Mutual are part of the global settlement negotiations.

John McDonald, a senior analyst at Bernstein Research, said in a research report the issue may be tough to resolve, because the agreement JPMorgan signed with the FDIC when it bought Washington Mutual does not specify which party - JPMorgan or the FDIC - is responsible for Washington Mutual's alleged breaches of representations and warranties in securitization agreements.

The FHFA sued JPMorgan in September 2011, accusing the bank of misleading Fannie Mae and Freddie Mac in their purchase of billions of dollars' worth of risky mortgage securities.

The regulator said JPMorgan falsely represented that the mortgages underlying the securities met underwriting standards. The securities were sponsored or underwritten by the bank, or two other companies it acquired, Bear Stearns Cos and Washington Mutual Bank.

The dispute has played out in a 2009 lawsuit filed by Deutsche Bank National Trust Co. claiming $6 billion to $10 billion in damages from Washington Mutual's alleged breach of representations and warranties in mortgages pooled into securities.

The FDIC has claimed it should be dismissed from the lawsuit and Deutsche Bank's claims should be against JPMorgan.

(Additional reporting by David Henry and Jonathan Stempel; Editing by Bob Burgdorfer)

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