(Adds no comments from FDIC, J.P. Morgan representatives in
paragraph 9.)
By Patrick Fitzgerald
Of DOW JONES DAILY BANKRUPTCY REVIEW
A federal judge says the Federal Deposit Insurance Corp. can't
dodge a $10 billion lawsuit over the toxic remnants of Washington
Mutual Bank.
Judge Rosemary M. Collyer of the U.S. District Court in
Washington, D.C., refused the FDIC's bid to dismiss a lawsuit filed
by a unit of Deutsche Bank AB (DB, DBK.XE) over soured pools of
mortgage loans made by Washington Mutual, or WaMu, a big player in
the home mortgage boom before it was seized by regulators in the
largest bank failure in U.S. history.
Deutsche Bank, as trustee for securitized pools of more than a
half million home loans, in 2009 sued both the FDIC and J.P. Morgan
Chase & Co. (JPM), which bought WaMu after it was seized by
regulators in 2008.
The trusts at issue in the lawsuit were the focus of an
investigation by a Senate subcommittee, which revealed that WaMu's
own internal reviews found that "loans marked as containing
fraudulent information had nevertheless been securitized and sold
to investors."
According to the Deutsche Bank suit, either the FDIC or J.P.
Morgan should be held to account for losses in the parcels of
WaMu's allegedly fraudulent or poorly underwritten home loans.
The judge said last week it would be "improvident and premature"
to dismiss the suit against the FDIC until a decision is reached
over whether the alleged WaMu liabilities stayed with the FDIC or
were transferred to J.P. Morgan.
J.P. Morgan bought WaMu but says it left behind the liabilities
at issue in the Deutsche Bank lawsuit. Collyer had already rejected
the bank's bid to dismiss the suit in May.
According to the FDIC, J.P. Morgan took on the liabilities
attached to the mortgage loan securitization trusts when it bought
WaMu.
Representatives of J.P. Morgan and the FDIC declined to
comment.
The lawsuit is part of a broader battle over what exactly J.P.
Morgan bought when it picked up WaMu for $1.8 billion as markets
seized up and the worldwide financial system teetered on the brink
in the fall of 2008.
Much of that fighting took place in bankruptcy court, where
WaMu's former parent, Washington Mutual Inc. (WAMUQ), took refuge
after being stripped of the thrift. WaMu's former parent struck a
deal with J.P. Morgan and with the FDIC over how to split up
billions of dollars in cash and tax refunds, assets that were
claimed by all three.
Embodied in a Chapter 11 plan, the Washington Mutual settlement
has yet to receive court approval. If it is ultimately approved,
most creditors of WaMu's former parent will receive payment in full
with interest, and some of the fighting over who was to blame for
WaMu's failure will end.
Final arguments over Washington Mutual Inc.'s $7 billion Chapter
11 plan start Wednesday in Wilmington, Del. Bankruptcy Judge Mary
Walrath, who rejected an earlier version of Washington Mutual's
Chapter 11 plan earlier this year, is overseeing the case and will
make the final decision on the revised plan.
-By Patrick Fitzgerald, Dow Jones Newswires; 202-862-3544;
patrick.fitzgerald@dowjones.com
--Peg Brickley contributed to this article.