Large banks like JPMorgan Chase & Co. (NYSE:JPM) could likely argue that the fraud provision suggests that the FDIC is liable for assisted transactions.
Richard X. Bove of Rafferty Capital Markets, LLC feels if banks take such a stance, it could be a game-changer.
Top banks’ legacy problems
According to Rafferty Capital Markets’ report, close to 475 banks failed in the United States. Some of the banks like JPMorgan Chase & Co. (NYSE:JPM) took over more than one institution.
For instance, Bank of America Corp (NYSE:BAC) took over the troubled mortgage lender Countrywide Financial Corp and securities firm Merrill Lynch & Co, while JPMorgan took over Bear Stearns Cos and WMI Holding Corp. Recently, JPMorgan Chase & Co. (NYSE:JPM) reached a tentative agreement to pay a record $13 billion fine to the Justice Department to settle probes into its residential mortgage-backed securities. Furthermore, FHFA has reportedly sought $6 billion from Bank of America Corp (NYSE:BAC) for settlement of claims that the bank willfully sold RMBS to Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). The banks’ major exposure arose after their purchases of the troubled institutions.
Analysts Devlin Barrett, Dan Fitzpatrick, Shayndi Raice and Saabira Chaudhuri of The Wall Street Journal report that the government’s aggressive pursuit of JPMorgan Chase & Co. (NYSE:JPM) will only make it less likely that future bank chiefs assist the U.S. in times of crisis.
Acquirers of failed banks liable
Richard X. Bove of Rafferty Capital Markets, LLC notes that the Justice Department apparently believes that a large number of the failed banks in the U.S. defrauded investors in the origination and sale of residential mortgages. The Justice Department further believes that the acquirers of these failed banks are liable for any fraud committed by the banks that were acquired.
However, Richard X. Bove of Rafferty Capital Markets, LLC feels banks like JPMorgan Chase & Co. (NYSE:JPM) are likely to argue that the fraud provision suggests that the FDIC is liable instead. To protect their shareholders’ interests, a number of banks are likely to contest any further payments, claiming these frauds were not committed by them.
The Rafferty Capital Markets analyst points out that with Bank of America Corp (NYSE:BAC) already paying $40 billion and JPMorgan Chase & Co. (NYSE:JPM) setting aside $23 billion for potential payments, this $63 billion is more than what the FDIC has in its insurance fund. The analyst also points out to defend claims from banks, Congress must come up with money to support the FDIC. The analyst wonders whether the FDIC would reduce its commitment to insure deposits by changing its mandate until the suits are over.
Richard X. Bove of Rafferty Capital Markets, LLC notes some recent reports point to government initiating deeper investigations against JPMorgan Chase & Co. (NYSE:JPM) to find more irregularities, as they couldn’t win on the purported fraud issue against acquiring banks when the FDIC is really liable.
