WaMu's Equity Takes the Offensive

| About: WMIH Corp. (WMIH)

WaMu’s (WAMUQ.PK) equity is steadily making progress towards dismissing the parent company’s board of directors. On Tuesday, shareholders Michael Willingham and Esopus Creek Value LP filed in Washington State Superior Court a complaint to compel a shareholder’s meeting.

The filing comes after an April 21st hearing where a Delaware bankruptcy judge determined that the bankruptcy code was inapplicable in preventing shareholders from compelling the parent company from holding an annual meeting. At that hearing WaMu argued that if a shareholder’s meeting were allowed the equity could replace its current board of directors, likely jeopardizing the proposed settlement between itself, JP Morgan (NYSE:JPM) and the FDIC that would return $6 billion in cash and tax returns to its estate.

The equity contends however that the board is in need of replacement because they are failing in their fiduciary duty to maximize the estate’s recoveries. While the proposed settlement does return $4 billion of cash and $2 billon of tax returns to WaMu, it forfeits the majority of its $5.6 billion of tax refunds and all of its litigation assets. If pursued WaMu’s litigation would seek a claw back of TPG’s $7 billion April 2008 capital contribution, as well as $3 billion from the sale of preferred securities marketed in December 2007, among other fraudulent conveyance claims. In all the litigation assets have been valued at approximately $20 billion if successfully tried.

WaMu’s equity committee is chaired by Michael Willingham, a Houston accountant whose past experience includes working as an investigator for the US Trustee in the Enron bankruptcy. In the Mirant (MIR) bankruptcy he served as an equity committee member whose keen knowledge of energy trading allowed for an improved company evaluation and eventual recovery for common shareholders in both stock and warrants of the reorganized company. Mirant’s presiding judge, D. Michael Lynn stated of Willingham, "If ever the U.S. Trustee was looking for a poster child for a committee member, [he] should be it. [His] understanding of the case is incredible. Better than many of the lawyers who have participated in it, in fact."

In addition to the push for an annual meeting the equity committee has filed a petition with the bankruptcy court to seek the immediate appointment of a court examiner, which they may receive as early as May 5th after the judge signed an order graining motion to shorten notice. If appointed the examiner would, "evaluate whether there are claims and causes of action held by the Debtors' estate against any person or entity… arising from circumstances leading to the closure of Washington Mutual Bank by the U.S. Office of Thrift Supervision, the FDIC as receiver for WMB, and the FDIC's sale of WMB assets to JP Morgan Chase," according to the 120 page filing.

The evaluation seems sensible. “After regulators shut down First Bank of Idaho in April, for example, congressmen Mike Simpson and Walt Minnick said regulators had ‘intentionally destroyed’ a pillar of the community ‘through inappropriate use of their powers’,” according to an investigation done by the Puget Sound Business Journal concerning WaMu. “We are concerned that the OTS and the FDIC did not give the bank enough time to capitalize properly, even though it is our understanding that they were nearing the end of negotiations with a willing investor.”

The filing further states the examiner’s duties would be to investigate, "any actions by JP Morgan (including communications to the media and securities transactions [such as short sales]), that could have had the effect of damaging market or government agency perceptions of WMB or WMI's financial health, capital adequacy, or liquidity.” In a Portfolio.com story, “WaMu’s team complained about negative news reports that had undermined confidence in their bank, prompting a big deposit run in its final weeks.

We couldn’t “get ahead of the story,” said one of them, according to former WaMu employees who attended the meeting.”

The examiner would also scrutinize “JP Morgan's communications about WMB or WMI with other actual or potential WMI investors or merger/acquisition partners or investment advisors (including Goldman Sachs) during 2008.” In early February TheStreet.com reported on email written by a JPMorgan investment banker that described a meeting which included CEO Jamie Dimon and Banco Santander (STD) Chairman Emilio Botin. “The email has raised some eyebrows because it seems to suggest that both banks were interested in pursuing the same acquisition targets, the likes of WaMu, SunTrust (NYSE:STI), Wells Fargo (NYSE:WFC) and others,” writes Jim Kim of FierceFinance.com.

Also the examiner would investigate, "the extent to which JP Morgan obtained confidential information from WMB or WMI during 2008, how it obtained such information, and how it used such information." In March 2008 JP Morgan was offered a rare peek into WaMu's books citing a desire to buy the bank. It signed a confidentiality agreement stating that it would not share information. Then JP Morgan made a lowball offer of $8 dollars a share. At the time WaMu was trading for $12. WaMu rejected the offer. “You should have taken Jamie Dimon’s offer,” then Treasury Sectary Henry Paulson told WaMu CEO Kerry Killinger later in July 2008.

If approved the examiner would receive 150 days in which to perform the investigation.

Disclosure: Author holds a long position in WAMUQ.PK