Some details firming up on that $13B settlement

JP Morgan settled up with Fannie Mae and Freddie Mac. JPM will pay:

  • ~$1.0B for loans made by Morgan
  • ~$1.8B for loans made by Bear Stearns
  • ~$1.2B for loans made by Washington Mutual
  • ~$1.1B to buy back loans underwritten by JPM
  • ~$5.1B total package

That’s from the article J.P. Morgan Settles With FHFA, in the Wall Street Journal.

This is part of the larger $13B package under negotiation earlier this week.

My head scratching continues about why Morgan is on the hook for loans made by other banks it acquired at the urging of the feds. The remainder of the settlement with the Department of Justice is stuck over the issue of whether JPM will get reimbursed by the FDIC for losses on the portfolio they acquired. Typically, that is the way it works. At least that’s my understanding on how acquisitions usually work.

So it is quite obvious that the feds want JPM to pay for mistakes they didn’t make.

The article shows that the FDIC would usually pick up that extra tab but the Justice Department wants language saying that JPM won’t get reimbursed.

Doing so would mean there is a $3B fine for helping out during the ’08 banking crisis.

Here’s the first of a four paragraph section describing that maneuvering:

The Justice Department, however, has been trying to insert language into its deal with J.P. Morgan that none of the costs the bank pays over Washington Mutual will be passed onto the FDIC, said people close to the talks. The Justice Department wants this language in order to avoid a situation in which a government penalty of a bank is essentially extracted from another government agency, the people said.

Another article at the WSJ, this time a blog post, J.P. Morgan Settlement Puts U.S. in Tight Spot, reinforces the point. The deal does call for JPM to pay for mistakes of the acquired firms and they could get reimbursed. The author, Mr. Guerrera, looks at the underlying acquisition document and sees that there is lots of room to make the argument that the FDIC should cover those payments. Such a reimbursement would consume a large portion of the FDIC’s reserves.

2 thoughts on “Some details firming up on that $13B settlement”

  1. I’m not understanding this logic at all. Since when does an acquiring company NOT assume the acquired companies’ liabilities? The legal exposure was well known and more than factored into the purchase price at the time the acquisitions were negotiated (by JPM, in this case).

    Legal exposure is always part of the acquisition price, and the discount that JPM got for acquiring BS alone was more than double the amount of these penalties. I am sure any bank would still be glad to step into JPM’s shoes today, with respect to the BS acquisition. I seem to recall the financial community was giddy over Dimon’s acumen in that deal and the fact that JPM paid only a fraction of its actual value, including the acquired legal liabilities.

    The fact that JPM and BofA, et. al. would be paying huge settlements for BS, WaMu and Countrywide was always known. They probably could have settled much more cheaply if they had capitulated sooner, but that would be JPM’s tactical error (as was going to trial, in BofA’s case).

    1. In a typical purchase, that is quite correct. The concept I’m working with is when a bank fails, the FDIC picks up the loss on the bad loans. From the great distance from which I’ve seen this, it sometimes is a fixed price with the buyer gaining/losing from the actual results and sometimes the losses are reimbursed after they are eventually sorted out. That’s what makes a bank takeover different. Complicating the due diligence was the crisis atmosphere and the need for a snap decision by everyone.

      You probably have experience in dealing with this particular issue, perhaps inside banking and probably several times outside banking.

      The article by Mr. Guerrera mentioned above cites a paragraph in the acquisition document that can be argued to say JPM did not take on certain liabilities including the one under discussion. Could also be argued, just as logically and reasonably, to say this particular liability is assumed. Thus, there will probably be a long court case.

      Great comment. Thanks for taking the time.

      The other argument, which I haven’t developed, is that Fannie and Freddie knew exactly what they were getting, which is junky subprime loans (NINA, no income no assets, an acronym I’ve learned in the last week). That would mean that JPM, Bear, and WaMu were selling Fannie and Freddie exactly what the GSEs wanted. Thus, where would be the harm that justifies a multi-billion settlement?

      Thanks again for commenting. I plan to have another post highlighting more people who think this is a travesty and others who think this is perfectly sized justice.

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