WaMu: The Equity Is Striking Back

Includes: JPM, WMIH
by: Troy Racki

By all accounts it looks like Washington Mutual's (WAMUQ.PK) chapter eleven bankruptcy is shaping up be a saga of Hollywood scripted proportions.

The Equity Strikes Back

On Thursday, Washington Mutual’s recently appointed equity committee filed their first major document in the holding company's ongoing litigation. The filing blasts the bondholder's legal counsel of Weil, Gotshal and Manges for using contradictory statements, "red herrings," and misrepresentation of the current bankruptcy code to support their motion for dissolution of the hard-earned committee.

While WaMu’s legal counsel has stated recently that nothing of the estate will be left over for its spurned shareholders, the equity committee turned Weil, Gotshal and Manges’ previous court filings against them, using the documents to demonstrate that at least $20.55 billion of assets may be available to cover the some $8.28 billion in liabilities the parent company currently owes. The remainder, the committee states, should be returned to, “WaMu shareholders who were instantly and inexplicably stripped of many billions of dollars in equity value…” when the FDIC foreclosed on the bank in September of 2008. The assets in question arise from pending litigation leveled against JP Morgan (NYSE:JPM) and the FDIC in the form of cash deposits, tax refunds, trust preferreds, and clawbacks of capital contributions to the bank.

The committee, comprised of six retail investors and one hedge fund, argues that "even a partially successful recovery on the liquidated portion of the claims would net a substantial recovery to equity holders." The committee’s filing further states that it would seem that Weil, Gotshal and Manges are attempting to, “wrap up the estate with recoveries for the [bondholders] alone,” even when all parties affected should be considered.

Delaware chief bankruptcy judge Mary Walrath is set to decide whether the equity committee prevails on January 28th.

A New Hope

The equity committee’s filing comes on the heels of the news that Congress, through the Senate Permanent Subcommittee on Investigations, has subpoenaed the FDIC for documents regarding the seizure and sale of Washington Mutual bank to JP Morgan. This information slipped out from one of the FDIC’s recent motions to dismiss which states it cannot comply with WaMu’s discovery process because of a, “massive document request from Congress regarding the resolution of Washington Mutual Bank.”

There is reason to believe that the Subcommittee on Oversight and Investigations of the House Financial Services Committee is also reviewing the FDIC’s actions because of its refusal to comply with multiple Freedom of Information Act requests regarding Washington Mutual, one of which was filed by the Puget Sound Business Journal. “I have requested [the committee’s] prompt review of this matter,” states Congressman Wally Herger (R-Calif.) through an e-mail with his office.

While shareholders who were “zeroed” by the sudden seizure of their bank are hopeful of what these investigations may reveal, which may include reparations, Jim Cramer’s TheStreet.com states that, “Washington politicians and regulators will be hesitant to reward vulture investors who have bought WaMu securities on the cheap following its 2008 bankruptcy.” Oddly enough this statement comes after the same article recommends investors purchase the distressed senior bonds of Washington Mutual Bank.

Vultures aside, politicians and regulators should keep in mind that there are plenty of sparrows who lost their retirements and employment because of the bank’s seizure. Many common shares of the company are still held by former employees and long term investors who in late 2007 paid upward of $36 a share for a piece of the 119-year-old WaMu. Now they sit on top of billions in losses. Some are hoping for a miracle to recover some of what they lost. Meanwhile WaMu's equity committee is looking for more: justice.

Attack of the Lawyers

Since its formation, WaMu’s equity committee has retained and filed for the representation of Gregory A. Cross to be a part of the ongoing bankruptcy proceedings. Mr. Cross is the leading partner of Venable LLP’s bankruptcy arm, one of the top ten firms in the D.C. area. According to their website Mr. Cross has, “led fraud investigations and conducted trials involving complex international transfers of assets… which have led to criminal convictions for bankruptcy crimes.”

Is WaMu’s equity committee attempting to send JP Morgan a message?

Disclosure: Long WAMUQ.PK