Bad WaMu Securities Won’t Haunt JPMorgan

(CN) - Though its worthless mortgage-backed securities dogged Washington Mutual, Deutsche Bank cannot force JPMorgan Chase to honor the obligation, a federal judge ruled.

Deutsche Bank National Trust brought the case at hand in 2009 against the Federal Deposit Insurance Corp., as the receiver for WaMu, which collapsed after securitizing bad home loans that cost investors billions.

When it failed, WaMu was the largest savings-and-loan association in the U.S with more than $188 billion in deposits, and 2,200 branches nationwide.

An amended complaint added JPMorgan Chase & Co. as a defendant since the bank bought Washington Mutual's assets and certain liabilities for $1.9 billion in 2009.

Finding Wednesday that JPMorgan "did not assume WaMu's unbooked mortgage repurchase liabilities," however, U.S. District Judge Rosemary Collyer dismissed it from the lawsuit.

The purchase agreement signed by the FDIC and JPMorgan states that JPMorgan assumes and agrees to pay "all of the liabilities of the failed bank which are reflected on the books and records of the failed bank as of bank closing."

This construction clearly excludes liabilities not listed on WaMu's financial accounting records, Collyer found.

The purchase agreement "does not state that JPMC assumed all liabilities arising out of any records at WaMu," according to the ruling (emphasis in original).

"Rather, it specifies that liabilities passing to JPMC were those reflected on WaMu's books and records at the time of WaMu's closing," Collyer added. "FDIC's interpretation does not square with the word 'reflect,' which, at its core, connotes visibility; under FDIC's proposed construction and argument, the P&A Agreement would transfer potential WaMu liabilities to JPMC of an unknowable monetary value and of any imaginable variety."

A review of agency correspondence regarding the sale shows that the FDIC wanted to assure bidders that it would be assuming only those liabilities that it would be able to discern with due diligence.

"The court finds it undisputed that the phrase was adopted to provide 'comfort' to bidders that they could discern liabilities to be assumed from what was shown on WaMu's accounting records and the phrase was not intended to expand liabilities to cover anything an acquiring institution could 'possibly have imagined,'" the judge said.

In a footnote, she added: "In other words, the court finds that any liability exceeding the Book Value reflected on WaMu's financial accounting records as of September 25, 2008 remained with the Federal Deposit Insurance Corporation as Receiver for WaMu."

Deutsche Bank thus cannot recover from the bank's new owner, Collyer noted that she would "leave[] to another day and another argument whether plaintiff Deutsche Bank can recover from FDIC."

Collyer declined to allow two dozen investment advisers to intervene in the suit in 2012.

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