WOW! What a clear, concise, informative article. 13-Oct-09 02:13 am No wonder USA Today is going down the drain! What day/night comparison!
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"WaMu "is far from being a zombie stock," says Hans Brost." Now why would Hans say this? Is he a zombie too, or are there some facts that Hans knows that Ask Matt hasn't bothered to mention? Answer: the latter. Ask Matt knows, or should be reasonably expected to know, the information below because he was sent this information prior to the publication of this article.
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The Little Known Story of Washington Mutual
(copyright 2009 Jamie-JJ)
On Sept. 25, 2008, the FDIC seized Washington Mutual Bank (WMB), placed it into receivership, and immediately sold all of its assets and some of its liabilities to JPM for $1.888 billion. JPM acquired WMB's deposit liabilities but not other liabilities. The FDIC reported that the seizure of WMB and sale to JPM was accomplished at zero cost to the FDIC. On Sept. 26, 2008, WMB's parent holding company, Washington Mutual Inc. (WMI), filed for Chapter 11 bankruptcy protection.
At the time of its seizure, WMB had $307 billion in assets, $188 billion in deposits, 2239 branches, 4,932 owned and branded ATMs, two credit card divisions, and 43,198 employees. WMI was the sole stockholder of WMB, and WMI lost $26 billion when its WMB stock became worthless due to the seizure.
In April 2008, JPM had tried to purchase WMB from WMI. JPM was given extensive access to WMB's books and signed a confidentiality agreement, as well as an agreement to not purchase WMB from any other seller. JPM's offer of $8 per common share was rejected by WMI as too low. Shortly thereafter, a group of investors raised $7 billion for a capital injection into WMB.
In early September 2008, WMI reported that WMB continued to maintain a strong liquidity position and had capitalization ratios that were above the regulatory requirements for well capitalized institutions. Prior to the seizure of WMB, federal regulators (OTS) never ordered WMB to raise additional capital or increase its liquidity, and an OTS fact sheet released on the day of WMB's seizure noted that WMB was well capitalized at the time of seizure. WMI had access to $50 billion in short-term liquidity from the Fed's secondary window but never utilized it.
WMI's Chapter 11 legal team believes that the FDIC committed two major errors in the seizure of WMB: (1) some of the seized assets belonged to WMI, not WMB, and therefore the FDIC did not have legal right to seize these assets; and (2) the FDIC sold the assets of WMB, which it did have legal right to seize, for less than fair market (liquidation) value. The FDIC has a duty to maximize the value of a receivership’s assets when it liquidates a receivership estate; the FDI Act specifically commands the FDIC to maximize the value of such assets. WMI has received $0 compensation for the loss of WMB because the FDIC has retained the $1.888 billion paid by JPM.
WMI has backed up these beliefs with lawsuits against both FDIC and JPM. WMI has not challenged the legal right of the FDIC to seize WMB; it is clear that the FDIC did have this right. The major basis of WMI's claims is simple: WMI did not receive fair value for its assets which were seized by the FDIC, and WMI is therefore entitled to compensation for the difference between the fair value and the actual amount received ($0). Altogether the compensation requested for these two types of FDIC errors is in the tens of billions of dollars. WMB's book value at the time of seizure is estimated to have been well over $20 billion, and a going-concern valuation yields a figure even greater than this.
Part 2---Re: WOW! What a clear, concise, informative article. 13-Oct-09 02:14 am Interestingly, WMI (apparently unbeknownst at the time to either FDIC or JPM) had approximately $4 billion in cash on deposit in WMB at the time of seizure. This cash is now on deposit with JPM, and WMI has sued to have this large amount of cash turned over to their estate in bankruptcy court. JPM has refused to release this cash and disputes that it is in a demand deposit account or that WMI has legal right to it.
Finally, WMI has sought and obtained, over the strong objection of JPM, the bankruptcy court's permission to investigate JPM for a variety of potentially tortious activities in the several years prior to the seizure of WMB. Included are allegations that JPM engaged in sham negotiations earlier in 2008 (while preparing its $8 per share offer for WMB) designed to elicit confidential information from WMI, and that JPM misused and publicly leaked this confidential information to gain an unfair advantage in obtaining WMB's banking assets, which had long been coveted by JPM
part 3 --- Re: WOW! What a clear, concise, informative article. 13-Oct-09 02:15 am Major court actions:
----Washington D.C. District Court----
(1) WMI sued the FDIC (3/20) for takings, conversion, and constructive fraudulent transfer. These claims are based on: (a) the FDIC did not obtain fair value for WMB assets seized, and (b) FDIC seized additional assets that were property of WMI, not WMB. Specified claims are ~$13 billion, and there are additional unliquidated claims.
----Delaware bankruptcy court----
(1) JPM adversary proceeding: JPM sued WMI (3/24) to try to preemptively settle claims for disputed assets. WMI responded with 18 countersuits (5/29), most of which are grounded in the legal theories of constructive fraudulent transfer and preferential transfer, with additional claims for I.P. infringement (copyright, trademark, patent);
(2) Turnover proceeding: WMI sued JPM (4/27) for turnover of the ~$4 billion of cash; WMI has asked for summary judgment (5/19);
(3) Rule 2004 examination: WMI asked for (5/1) and has received permission (6/24) to investigate JPM for business tort claims for actions that took place prior to the seizure of WMB in September; subpoenas for document production have been served on JPM (7/6); WMI seems to have agreed to allow a delay in document production.
Soon after WMI filed their first lawsuit, against FDIC in March 2009, a corporate bankruptcy lawyer wrote:
"You are about to see the awesome power of Chapter 11 unleashed on both a government agency and the nation's most powerful bank. Watch and learn."
Part 4 --- Re: WOW! What a clear, concise, informative article. 13-Oct-09 02:16 am Over the past six months, those who have been watching have indeed learned about the power that a Chapter 11 bankruptcy judge wields protecting her Debtor and attempting to maximize the value of the Debtor's estate for the benefit of its creditors.
The major rulings so far in bankruptcy court (little significant action in D.C. court so far):
- FDIC and JPM attempts to invoke FIRREA jurisdictional bar: denied
- FDIC and JPM motions to stay two adversary proceedings or remove to D.C.: denied
- WMI Rule 2004 motion to examine JPM: approved
- JPM motion for reconsideration of Rule 2004 motion approval: denied
- WMI subpoena of JPM for Rule 2004 documents: served
- JPM motion to dismiss WMI's 18 counterclaims: denied
- JPM attempts to categorize the two adversary proceedings as non-core: denied
- JPM attempt to divest bankruptcy court of authority pending appeals: denied as frivolous
Information from JPM's financial statements filed since WMB seizure:
(1) Immediately after the purchase of WMB from FDIC, JPM projected that the transaction would add $2.4 billion to JPM’s net after tax operating income in 2009 alone. Thus, JPM expected the transaction to be immediately profitable.
(2) JPM 1st quarter 2009 10-Q: "...the net income impact of Washington Mutual’s banking operations could be approximately $0.50 per share in 2009." JPM has 3.76 billion shares of common stock, so at 50 cents per share that's $1.88 billion net income in one year attributable to the acquisition of WMB. Interestingly, JPM paid $1.88 billion to the FDIC for WMB.
(3) In explaining an amount accounted for on balance sheets as an "extraordinary gain", the 10-Q states "JPMorgan Chase acquired the banking operations of Washington Mutual Bank for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price..." This latter fact is the basis for the lawsuit against the FDIC and also many of the claims against JPM.
(4) JPM recorded negative goodwill in accounting for the purchase of WMB from FDIC, indicating that, immediately upon consummating the transaction, the fair market value of assets acquired exceeded the purchase price. Such negative goodwill is unheard of in a major acquisition.
(5) Soon after the purchase of WMB from FDIC, JPM wrote down $30 billion in WMB assets due to estimated future loan losses (commonly referred to as "toxic loans"). On May 26, 2009, Bloomberg reported the following on the reported $30 billion in losses: "JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income." In other words, all but $1 billion of the $30 billion write down losses will be negated by the subsequent $29 billion write up.
Current WMI financials, from bankruptcy court filings:
-- Assets: $6.9 billion
-- Liabilities: $8.2 billion
-- Current shortfall: $1.3 billion
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