JPMorgan Chase filed quite a remarkable quarterly report with the Securities and Exchange Commission on Thursday, crammed with far more details about its exposure to litigation and mortgage repurchase demands than the earnings report the bank issued in mid-October. Among the revelations: JPMorgan has reached an agreement in principle to settle two SEC investigations, one involving a single unidentified JPMorgan securitization, the other involving Bear Stearns’s crafty (alleged) trick of keeping put-back recoveries from mortgage originators for itself instead of passing them on to investors in mortgage-backed securities trusts. The SEC deal has been long rumored, and though we still don’t know any of its terms, the bank’s filing confirms it.
JPMorgan also disclosed that it is now facing put-back claims, in one form or another, on $140 billion in mortgage-backed notes. Yes, you read that right: $140 billion. That doesn’t mean there are $140 billion in claims, but it means that holders of $140 billion in MBS notes have asserted, in litigation or through contractual demands, that the bank must buy back deficient mortgages in their trusts. Given that MBS investors generally claim breach rates in excess of 50 percent, JPMorgan’s exposure to mortgage put-backs is tens of billions of dollars.
The bank, of course, thinks the put-back demands are meritless and its entire litigation exposure is a trifling matter. The SEC filing’s 10-page discussion of the various litigation headaches facing JPMorgan — which include really serious matters, such as the securities class action over its CIO losses, various Libor suits and the Federal Energy Commission’s market manipulation case – begins with the brash assertion that the bank’s “reasonable possible losses” in all of this litigation (aside from its litigation reserves) range from zero dollars to $6 billion.
Zero dollars? I think not. In fact, I’m prepared to say that based on two rulings this week by U.S. District JudgeDenise Cote of Manhattan in the Federal Housing Finance Agency’s securities fraud litigation against MBS issuers and underwriters, JPMorgan has exceedingly low odds of getting out of the Fannie Mae and Freddie Mac conservator’s case — which involves claims on $33 billion in JPMorgan, Bear and Washington Mutual MBS — wit h out a settlement.
More importantly, Cote’s rulings this week make it clear that the judge, who is overseeing the FHFA’s cases against 16 banks that issued or underwrote mortgage-backed securities, does not intend to let any of them out of this litigation. I’ve already told you that the banks still have a slim chance of wiping out most of the FHFA’s claims on timeliness grounds, if the 2nd Circuit Court of Appeals overturns Cote’s holding that Congress intended to extend the obscure statute of repose, along with the statute of limitations, when it passed the law that created the FHFA. But unless the banks win a reprieve from the appeals court, it looks like Cote intends to send Fannie and Freddie’s claims to a jury.