It appears that the WaMu saga won't be ending any time soon.
In March, Washington Mutual’s (WAMUQ.PK) parent company presented to a bankruptcy court in Delaware a proposed settlement between itself, JP Morgan (JPM) and the FDIC, one that would bring a quick resolution to months of legal wrangling over tens of billions of assets but would leave its equity in the lurch. Now the probability of that settlement surviving wanes with each passing day.
"The Joint Plan and Disclosure Statement have unmistakably been prepared and distributed with great haste,” stated Edmund Brown Jr., Attorney General of California in a court filing on Friday. “This is evident from the obvious deficiencies in the Disclosure Statement, from the fact that the Global Settlement Agreement, the centerpiece of the Joint Plan, does not yet have the agreement of the FDIC, one of the key parties to that agreement, and from Debtors' frank admission that the Disclosure Statement does not meet the "adequate information" requirement of section 1125 of the code.”
Mr. Brown represents the California Department of Toxic Substances which is seeking a recovery from the estate to clean up a class I landfill owned by one of WaMu’s subsidiaries, WMI Rainier LLC. In his filing Mr. Brown voiced concern that WaMu has withheld disclosing the value of all its assets. Recently WaMu petitioned the court to hire Blackstone Advisory Partners L.P. as a financial advisee for its estate, but only to evaluate certain assets and securities. Blackstone will also advise regarding WaMu’s planned rights offering in a new company which will be available to certain creditors.
However Mr. Brown believes that WaMu’s services of Blackstone are, “unlikely to produce the necessary and therefore mandatory information about WMI Rainier LLC in particular and about Debtors' assets generally,” and has requested the court deny Blackstone’s retention.
So far WaMu has kept to generalities regarding the value of its estate. When it initially filled for bankruptcy protection in September 2008, WaMu listed approximately $33 billion in assets and $8 billion in debt. However in its most recent monthly operating report it lists only $6.9 billion in assets, just twenty percent of what it had nineteen months ago. So where did the rest go?
According to WaMu’s last annual report, the parent company held a $26.3 billion dollar investment in their banking subsidiaries, WMB and WMBfsb. While this investment was zeroed by the FDIC’s seizure it still has value as a capital loss against future corporate income and therefore an asset. At a 35 percent federal income tax rate the value of the loss is worth $9.2 billion in future tax savings, a definite reason for the company to pursue reorganization. The 10-K also listed $1.1 billion in non-bank subsidiaries, and $1.9 billion of other assets. Yet WaMu’s current MOR replies with only $1.4 billion of subsidiaries and $100 million of other assets. Where is the rest?
For WaMu mum is the word. The MOR clearly states that it is unaudited. Furthermore the operating report indicates that the company’s investment in its subsidiaries represents only book value and not the market value of these entities. In other words, there is likely hidden value.
Hiding value in bankruptcy is big business. In K-Mart’s (SHLD) 2002 bankruptcy, distressed security traders bought up creditor’s claims in the holding company and then underestimated the value of the company’s real estate assets. By doing so they were able to prove that the equity was “out of the money” and jettison its claims to a distribution. After the creditors reorganized the company in 2003, K-Mart sold multiple real estate holdings for their true value. Within a year K-Mart shares appreciated 250%.
In the case of Mirant’s (MIR) 2003 bankruptcy it was more of the same, except for a different ending. Creditors in the case, using Blackstone Group LP’s evaluations, initially low balled the value of the company’s electric power plants and natural gas trading contracts. Shareholders were due to be extinguished.
"Mirant's reorganization plan leaves shareholders, like me, who lost their investment, out in the cold," stated Mirant shareholder Al Kroemer during an April 2005 equity rally in front of the Texas bankruptcy court. "This is like a bank stealing your house, then selling it for half its value to a friendly 'competitor' who then resells it in the broader market for its real value and splits the profits with the bank. The rightful owners end up with nothing!" Three years later these words would seem prophetic. In September 2008, JP Morgan purchased WaMu’s $300 billion of assets for $1.9 billion from the FDIC.
Mirant’s equity committee began to suspect the reality of an under evaluation when Mirant debt began trading at or above par. Eventually the presiding judge ruled that Mirant would have to update its value by using current natural gas prices. This only came after the equity committee successfully argued, during a record 27 days of valuation hearings, that the utility was using outdated data. The judge’s ruling forced Mirant to increase its balance sheet by $450 million, enabling shareholders to receive a 3.75% recovery in ownership of the new corporation.
If history is any precursor, it would seem that WaMu’s creditors are up to the same as their predecessors. WaMu parent company senior debt has traded as high at 110 cents on the dollar this year but in light of the recent problems concerning the settlement agreement it has retreated to 104. Oddly enough, for debt in default, WaMu Incorporated is trading on par to S&P “A” rated corporate debt in companies such as HSBC Finance (HBC). As some would say, when there is smoke, there’s fire.
Will WaMu go the way of the K-Mart or the Mirant? It looks like that is up to the bankruptcy judge, and to a lesser degree, WaMu’s equity committee.
Disclosure: Author holds a long position in WAMUQ.PK