The Ghost of Countrywide Past

ConstructionBond insurer Ambac Financial Group Inc said JPMorgan Chase & Co will pay $995 million to settle disputes related to residential mortgage-backed securities.

The settlement will have a positive impact on Ambac’s fourth-quarter operating results and its claims paying resources, Chief Executive Nader Tavakoli said in a statement. The settlement comes two weeks after Reuters reported that three of Ambac’s top 10 shareholders were calling on Tavakoli to step down, claiming that he was slow to settle $4 billion in insurance claims and lawsuits against Countrywide Home Loans Inc, Bank of America Corp and JPMorgan. Ambac has publicly resisted calls to speed up its payment of insurance claims, citing concerns that it wouldn’t be able to meet its liabilities that extend out to 2054. The agreement will not have a material effect on JPMorgan’s first quarter earnings, the Wall Street bank said in a regulatory filing.

The settlement also provides for the withdrawal of Ambac’s objection to JPMorgan’s $4.5 billion settlement with trustees of trusts issued by JPMorgan, Chase and Bear Stearns. The resolution underscores how Wall Street is yet to shake off the legacy of the U.S. subprime crisis, when mortgages were sold to people who could not afford them and then repackaged for investors without an adequate explanation of how risky they were. Ambac sued Bank of America Corp in 2014 to recoup hundreds of millions of dollars of losses from insuring securities backed at least in part by risky mortgages from the bank’s Countrywide Home Loans unit. Goldman Sachs Group Inc said earlier this month that it would pay regulators over $5 billion to settle claims that it misled mortgage bond investors during the financial crisis.

The settlement comes after a federal judge last fall ruled for J.P. Morgan, saying the bank didn’t abuse its leverage as Lehman’s primary clearing bank to force the investment bank to hand over more collateral in the weeks before its September 2008 collapse. The deal, unveiled Monday night in a filing in U.S. Bankruptcy Court in New York, resolves the bulk of Lehman’s $8.6 billion lawsuit against J.P. Morgan and the bank’s counterclaims against Lehman. It also puts to rest Lehman’s challenges over J.P. Morgan’s closeout of thousands of derivatives contracts following the investment bank’s collapse. Although the settlement doesn’t resolve all the claims between Lehman and J.P. Morgan, it ends a “significant portion” of their disputes, court papers said, and allows the postbankruptcy Lehman estate to make another $1.5 billion distribution to the investment bank’s creditors. Lehman initially sued J.P. Morgan in May 2010, alleging in the suit that J.P. Morgan engaged in a “voracious” cash grab to create an $8.6 billion “slush fund” in the investment bank’s final days. Lehman had pledged billions of dollars as collateral for tens of thousands of derivatives transactions with J.P. Morgan as well as for overnight loans arranged by the bank. As Lehman’s chief clearing bank, J.P. Morgan provided cash advances of as much as $100 billion a day to Lehman to facilitate overnight repurchase, or repo, agreements. That role resulted in J.P. Morgan being one of Lehman’s main adversaries in numerous disputes surrounding the investment bank’s demise as well as one of its largest creditors. J.P. Morgan later countersued the investment bank, saying it extended to Lehman hundreds of billions of dollars in credit that actually benefited Lehman’s creditors by avoiding a fire sale of the bank’s assets in the days following Lehman’s failure. In the turbulent days after Lehman filed for bankruptcy, it sold its broker-dealer business to Barclays PLC. When the dust settled, J.P. Morgan said some $25 billion it had advanced to Lehman’s broker-dealer was left unpaid and it was stuck with the illiquid securities that Barclays didn’t want. To close the hole, J.P. Morgan applied $8.6 billion of collateral that Lehman’s holding company had pledged to the bank in the days before its collapse. Lehman, once the nation’s fourth-largest investment bank, collapsed into the largest bankruptcy ever in September 2008. The filing sent markets into turmoil and helped trigger a global financial crisis.

The legal fight with J.P. Morgan is one of a few large remaining orders of business for Lehman, which officially emerged from chapter 11 protection in March 2012. Since then, the company, which is being overseen by a new board of directors, has paid back tens of billions of dollars to creditors while searching for more funds through lawsuits and settlements. The holding company is winding down and selling off its remaining holdings, a process that is expected to continue for several years.