Seeking Alpha
Deep value, long only, special situations, long-term horizon
Profile| Send Message|
( followers)  

In the financial world of high paid, high profile corporate CEOs and institutional mutual fund managers, names such as Dorothea Barr, Saul Sutton, and Joyce M. Presnall do not seem particularly familiar. And they should not. Instead they are just three names; three drops in the river of unrecognized blue collar retail investors that keep America moving with their hard earned – blood, sweat, and tears – capital. It is by their many deposits that banks extend credit, by their investments into the equity market that publically traded companies can sell shares to finance growth.

Unfortunately these nameless millions are the first to be written off by big corporations and a sometimes apathetic government when times turn tough. Usually they have little recourse.

However on Monday, two dozen of these forgotten investors trekked to Willimgton, Delaware on a mission: to fight for their rights as creditors in the ongoing Washington Mutual (WAMUQ.PK) bankruptcy. Some such as Dorothea Barr came from as near as Virginia, others traveled as far as 3,000 miles to represent their fellow investors who could not. They came to be heard and to not be forgotten in the protracted bankruptcy battle between Washington Mutual's bankrupt holding company, the FDIC, and JP Morgan (NYSE:JPM).

Because of their actions, six of these retail investors, along with a single hedge fund, are now the new faces of Washington Mutual's equity committee, a group of investors that were effectively "zeroed" when the FDIC foreclosed on the bank in September of 2008. Since then the holding company has been locked in a fierce battle over assets ranging from $4 billion in cash, $3 billion in tax refunds, and $4 billion in preferred trusts backed by HELOCs.

Washington Mutual’s parent company argues these assets are theirs and wants to see them go towards satisfying the some $6.5 billion of senior and subordinated debt that was cast off by JP Morgan in its $1.9 billion dollar acquisition of the bank. JP Morgan argues that all these assets are theirs, according to the FDIC’s somewhat ambiguous purchase agreement. At the moment all decisions are currently being left up to Delaware chief bankruptcy judge Mary Walrath who has yet to issue a major ruling.

Whether the assets swing one way or the other, the one thing for certain is that Washington Mutual’s shareholders are last in line to divvy what is left over. Up until this point equity holders have had no seat at the bankruptcy table despite grass roots petitioning that raised some 3,500 letters that were sent to the US Trustee presiding over the bankruptcy case. The US Trustee’s argument was that there would be nothing left over for shareholders and hence held off on the formation of an equity committee for the last sixteen months.

However all that changed when in December it was revealed, because of new stimulus law, that WaMu could receive an additional $2.6 billion in tax refunds, bringing the total to $5.6 billion. With that revelation it appears that some money may reach equity holders, which prompted the US Trustee to act in an expeditious manner, forming the equity committee in just fourteen business days.

During that time serious questions regarding the seizure and sale of WaMu have begun to surface. A glaring light was cast by Puget Sound Business Journal reporter Kirsten Grind in a story that investigated whether or not JP Morgan and the FDIC were in talks regarding the seizure of the bank months before it occurred. While the FDIC has refused to release any information, a subpoena against JP Morgan by Washington Mutual turned up hundreds of pages of information which includes suspicious e-mails about what JP Morgan termed “Project West”. Among those many pages, a very concerning internal e-mail passed by JP Morgan executives on July 17th, 2008 that reads, “We are thinking through how to make up the assisted scenario – we may get more color tomorrow with the regulators – if not we will make something up.”

Needless to say retail investors like Saul Sutton are furious with revelations such as these and trekked to Delaware to be seen and heard. Mr. Sutton, who wrote the New York Times in November of 2008, stated he and his family suffered, “a giant loss” from WaMu’s seizure and that he “cried for a week” while attempting to cope with his losses. Mr. Sutton’s story is just one of many belonging to a similar thread. Tens of thousands of WaMu employees lost their jobs and retirement savings when their bank was seized. Some even took their own lives.

Joyce M. Presnall’s journey to Delaware required traveling 3,000 miles across country, lugging with her some 3,500 meticulously collected letters belonging to other spurred shareholders in WaMu. By last reported accounts this ad-hoc group holds some 100 million common shares and approximately twenty-five percent of the preferred securities. Her mission: To represent the many could not attend the equity committee formation on four day’s notice.

Whether JP Morgan CEO Jamie Dimon – who Mother Jones recently reported made $100 million in compensation between 2005 and 2008 – and the FDIC chairwoman Sheila Blair will have to answer for their actions, is unknown, it is currently being considered by a federal panel that will begin hearings on Wednesday.

Meanwhile WaMu’s own legal counsel has filed against the equity committee formation. They believe that despite the assets in question, along with the possible billions of recovery from litigation currently against JP Morgan and the FDIC, that the equity holders will still see no recovery. Judge Walrath has yet to rule whether the committee will stand. In the mean time it appears that the case of WaMu is taking on a David and Goliath aspect where the future actions of the retail investor may very well decide who will come out on top.

Leather slingshots closed at $8.00 on Monday, up seven cents on light volume.


Disclosure: Long WAMUQ.PK

Source: WaMu Bankruptcy: Retail Investors Gain Representation