The ongoing negotiations between the Department of Justice and JPMorgan Chase (JPM) around legal liabilities related to the mega bank’s acquisition of Washington Mutual could be detrimental to future failed bank settlements.

The tentative $13 billion settlement between the Justice Department and JPMorgan would resolve a number of probes into the sale of bonds during the housing boom. But considering WaMu is a failed banking institution there is a chance federal insurance may be needed to actualize the DOJ requirements.

The major concern is if the bank reclaims assets of the receivership then almost every other failed bank with a non-loss sharing agreement has precedent to settlement agreements, which will ultimately hit the Federal Deposit Insurance Corp.’s deposit insurance fund, explained Graham Fisher & Co managing director Josh Rosner in a conference call today.

JPMorgan bought $300 billion of WaMu assets for $1.9 billion, and since the crisis it has made between $15 billion and $18 billion from the acquisition.

“It would be an absolutely travesty if they could go after the FDIC corporate or receivership to recoup expenses from the settlement,” he argued.

Mortgage analysts believe the settlement will not break down, in part to a steady housing recovery propping up the values of the underlying collateral. But it may break the trust and confidence of homeowners still reeling the consequences of the housing meltdown, stated National Association of Neighborhoods executive director Ricardo Byrd.

As a result, JPMorgan faces options to handle the settlement. For one, it can settle all suits, except for the WaMu claims or the bank can settle entirely and accept all liability of the failed bank. However, there still remains the chance JPM walks away from any negotiations on the table.

“They need to accept all liabilities, but that comes with further costs due to private suits from investors. But, it's the most logical path,” Byrd pointed out.

If JPMorgan were to dip into the FDIC receivership or insurance fund, it would put the agency’s mission at stake as being able to receive too-big-to-fail banks.

More importantly, if FDIC were required to allow JPMorgan to tap into its insurance fund it would result in larger, future implications that all other failed bank deals could acquire funds from the FDIC.

Going forward, market participants are questioning the overall organized principle structure of the government in regards to recovering settlements from banking institutions. 

Two years ago, federal agencies as well as the president’s mortgage task force entered into servicing practices agreements. Currently, these enforcement agencies are in origination practices as a way to attempt to consolidate all of the federal and state mortgage-related claims. The purpose of this is to establish a single, unified solution to bound legal liabilities.

“At the end of the day, as long as the liabilities are outstanding, it hampers the bank to move forward and expand their lending practices,” Rosner said.

He concluded, “It’s in the best interest of economic healing and recovery in which all outstanding obligations are addressed so we can move forward.”