FDIC has to face $10 billion WaMu-related lawsuit

WILMINGTON, Delaware Tue Aug 23, 2011 5:55pm EDT

WILMINGTON, Delaware (Reuters) - A federal judge ruled that the Federal Deposit Insurance Corp has to face a $10 billion lawsuit tied to the failure of Washington Mutual Bank.

The judge refused the FDIC's request to dismiss the lawsuit brought by Deutsche Bank National Trust Co over bad mortgages that were securitized by Washington Mutual.

Washington Mutual, or WaMu, was seized by the Office of Thrift Supervision in September 2008 in the biggest bank failure in U.S. history.

The FDIC was appointed receiver and immediately sold the bank to JPMorgan Chase & Co for $1.9 billion.

The Deutsche Bank unit filed its lawsuit in 2009 arguing that loans that were pooled into mortgage bonds did not meet the underwriting standards that had been promised by WaMu, causing investors to lose billions of dollars.

A Senate committee report this year said WaMu's mortgage securitization was "polluting the financial system" with bad home loans and partly to blame for the 2008 financial crisis.

The FDIC argued it should be dismissed from the lawsuit and Deutsche Bank should bring its claims against JPMorgan, which assumed WaMu's liabilities as well as assets.

JPMorgan has denied it assumed any WaMu liabilities.

Judge Rosemary Collyer of the U.S. District Court denied the government agency's request last week. She said it would be "improvident and premature" to dismiss the FDIC from the lawsuit after refusing a similar request by JPMorgan.

A spokesman for the FDIC did not immediately respond to a request for comment.

The case is Deutsche Bank National Trust Co v Federal Deposit Insurance Corp et al; U.S. District Court for the District of Columbia, No. 09-1656.

(Reporting by Tom Hals, editing by Matthew Lewis)

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Comments (3)
NoyoPacific wrote:
FDIC stands for Federal DEPOSIT insurance Corporation. Since the securities in question were mortgage-backed bonds rather than deposit accounts, I can’t see any basis for the Deutsche Bank’s claim. Even if they were considered deposits for the purposes of the claim, why wouldn’t the claim be limited to the maximum amount per account of $250,000? I wish the reporter had addressed these issues.

Aug 23, 2011 8:30pm EDT  --  Report as abuse
saintattila wrote:
OTS seized bank. FDIC appointed Receiver. FDIC sells JPM certain of the assets without the liabilities. The heart of this matter is that Judge Collyer wants to find out exactly what was transferred to JPM from FDIC via the Purchase and Assumption agreement (contract) that sold off the good parts of WaMu. Hence, she didn’t dismiss when JPM requested it, and now she didn’t dismiss when FDIC requested it.

Aug 24, 2011 9:15am EDT  --  Report as abuse
FDRLiberal wrote:
Unless JPM signed a waiver and the FDIC agreed that JPM shouldn’t be held liable for bad underwriting standards, I don’t see how the judge can hold the FDIC culpable.

I would be very surprised that Ms. Bair would agree to terms that would put the FDIC on the hook for bad loans.

Aug 24, 2011 7:26pm EDT  --  Report as abuse
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