Legal

We all knew the Gibbs & Bruns mortgage-backed securities investor group -- which includes Black Rock, PIMCO, and the New York Federal Reserve's Maiden Lane entities -- didn't just hold Bank of America notes. For months, the question has been where the group that negotiated the embattled $8.5 billion Countrywide MBS settlement would strike next. Surely Morgan Stanley's recent disclosure of a Gibbs & Bruns letter warning of action on $6 billion in MBS wasn't the end of the investor group's campaign.

On Friday we found out what Kathy Patrick and Robert Madden of Gibbs & Bruns have been doing when they're not working to save the BofA deal. The firm announced that it has instructed five securitization trustees to investigate deficiencies in 243 JPMorgan Chase MBS trusts with a face value of more than $95 billion. The group said it has 25-percent voting rights in each of the MBS trusts, which gives it the contractual right, under MBS pooling and servicing agreements, to demand action by the securitization trustees. If the trustees do not act within 60 days, the investor group can bring breach of contract claims against JPMorgan, asserting that the bank must put back underlying mortgages that don't meet underwriting guidelines.

The Gibbs & Bruns announcement does not actually threaten a suit against JPMorgan. After the firm sent a similar demand letter in October 2010 to Countrywide's securitization trustee, Bank of New York Mellon, it agreed to hold off on litigation when BofA and BNY Mellon eventually agreed to begin the talks that led to the $8.5 billion proposed settlement. That settlement, announced in June, was a global deal, purporting to resolve put-back claims not only in the Countrywide MBS trusts in which the Gibbs group held the requisite voting rights, but in another 200 or so trusts as well.

The negotiation process might be more complex for JPMorgan since there are five securitization trustees (BNY Mellon, US Bank, Wells Fargo, Citibank, and HSBC). Moreover, the BofA template, which Gibbs & Bruns hoped to use in settlements with other MBS issuers, has come under vehement attack from Countrywide investors who aren't part of the Gibbs group and argue (among other things) that Gibbs & Bruns had no right to negotiate on their behalf.

If, however, you use the BofA example to predict a result for JPMorgan, you have to assume that JPMorgan will have to come up with between $1 billion and $2 billion to make Gibbs & Bruns's group go away. The proposed BofA settlement wasn't negotiated on the basis of the face value of the Countrywide notes, but instead on default and breach rates. Those rates won't be the same for JPMorgan -- but they won't be drastically different either. Nor will the success rate, which is the percentage of put-back claims that the bank actually agrees to pay. So considering that Gibbs & Bruns got an $8.5 billion settlement on notes with a face value of $424 billion, it's unlikely the firm will agree to much less than a couple billion to resolve claims on securities with a face value of $95 billion.

Gibbs & Bruns declined comment beyond its press release. I left a message requesting comment with JPMorgan but didn't hear back.

(Reporting by Alison Frankel)