Does JPMorgan Deserve $1B from the FDIC?

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source: http://www.flickr.com/photos/81446200@N05/

After an onslaught of federal litigation, it appears to be JPMorgan Chase’s (NYSE:JPM) turn to sue the government. On Tuesday, JPMorgan filed suit with the Federal Deposit Insurance Corporation, claiming that it is owned more than $1 billion in compensation from unmet obligations related to its acquisition of Washington Mutual Bank.

Washington Mutual Bank — which was owned by Washington Mutual — was the largest bank, as measured by assets under management, to collapse during the 2008 financial crisis. The firm failed following a nine-day run on its deposits that occurred at the same time that Lehman Brothers filed for bankruptcy. The Office of Thrift Supervision placed WaMu Bank into receivership on September 25, 2008, and shortly thereafter sold it to JPMorgan for $1.9 billion.

JPMorgan acquired the bank’s assets, secured debt obligations, and deposits — all told, about $307 billion worth, but JPMorgan had to write down about $31 billion worth of bad loans and raise $8 billion in new capital to  absorb the institution.

As part of the deal, the FDIC agreed to “indemnify JPMC both for liabilities JPMC did not assume and for numerous other matters,” according to the lawsuit, which was seen by Reuters. JPMorgan claims that it only agreed to acquire WaMu Bank because the FDIC made promises to cover certain liabilities. WaMu had just failed, and it was clear that JPMorgan would have to mop up not only the financial mess but also the legal mess. WaMu Bank failed in part because it made bad loans and sold those bad loans to Fannie Mae and Freddie Mac.

JPMorgan has since been sued for billions by federal authorities because of those and other bad loans made and sold before the financial crisis. The bank announced that it had settled with President Barack Obama’s RMBS Working Group on November 19 for $13 billion. The penalty — the largest ever levied against a single financial institution by the U.S. Department of Justice — settles many of the allegations, some of which were related to WaMu Bank.

JPMorgan admitted to neglecting to warn investors about the risk involved in purchasing mortgage securities, but did not admit to fraud or that it had intentionally misled investors. Such neglect is still illegal: It was one of the cornerstones of the Justice Department’s suit against the firm.

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