Washington Mutual Senior Bondholders Announce That They Do Not Support the Proposed Settlement
NEW YORK, May 24 /PRNewswire/ -- Today, senior bondholders of Washington Mutual Bank (WMB) reacted to the announcement by the Federal Deposit Insurance Corporation (FDIC) on Friday of its approval of a proposed settlement among the FDIC, Washington Mutual Inc. (WMI), and JP Morgan Chase (JPMC), of claims relating to the WMB receivership estate and WMI's bankruptcy proceedings.
"This proposed settlement by the FDIC would represent an enormous loss to the WMB estate," said William Isaacson of Boies, Schiller & Flexner. "The FDIC is signing off on a several billion dollars windfall to WMI and JPMC, including by affording them WMB-driven tax refunds made permissible by the 2009 stimulus legislation and giving effect to questionable reallocations by WMI of intercompany loans during the week prior to WMB's failure. Moreover, the proposed settlement would provide for vastly inferior treatment of the claims against WMI asserted by bank bondholders compared to the treatment afforded to the claims of the WMI noteholders, without any adjudication of the respective claims. The dramatically superior recovery of bondholders at the parent company level – under the proposed settlement, virtually all of the WMI noteholders including subordinated holders, will be paid in full, whereas senior WMB noteholders will not receive anything close to payment in full – will deliver the negative message to the marketplace to beware of investment in bank bonds because the FDIC will not protect bank creditors even where, as here, the assets were at the bank and the holding company noteholders were told at the time they purchased their notes that, in the case of an insolvency of the bank and the holding company, their recovery would be subordinate to that of bank creditors. This raises serious questions about the FDIC's ability to handle the collapse of large institutions and manage apparent conflicts of interest which pervade their statutory authority."
Isaacson added "our clients do not support this proposed settlement. They will seek to vindicate their rights and claims, including their claims in the WMI bankruptcy proceedings, until a decision on the merits is reached."
The settlement announced Friday follows a similar announcement by WMI last March of a purported settlement at that time. The FDIC reversed course then and rejected the earlier March proposed settlement, which quickly derailed after it was publicly disclosed that JPMC would receive billions in tax refunds from stimulus monies to which it was not entitled.
A comparison of WMI's March proposal with its announcement last Friday reveals that this same central flaw continues to infect this new proposed plan. The major change is that JPMC is allocated $300 million of additional value primarily from the first tax refund (attributable to WMB's operating losses post-sale). Furthermore, the FDIC has allowed JPMC to reserve its rights to seek further consideration related to those same liabilities that were the subject of controversy in the March proposal.
Indeed, the FDIC has agreed in the new plan to provide several hundreds of millions less to the WMB receivership estate than the previous plan rejected by the FDIC. WMI's share of the second tax refund (attributable to the 2009 stimulus package) is increased by nearly $700 million, thereby improving the recoveries of WMI noteholders by nearly $400 million. The FDIC agreed to this dramatic increase even though the FDIC had previously acknowledged in court that WMI had no claim at all to the WMB tax refunds. Contrary to the FDIC's statutory responsibility to the WMB receivership, it has given up substantial value for no consideration.
WMI withdrew nearly $13.0 billion in dividends from WMB during 2006 and 2007, a time period in which the housing market was beginning to deteriorate and loan delinquencies were escalating. The WMB senior bonds provided essential financing and liquidity in order to facilitate these dividends. By the end of 2007, given all the cash it had taken out of WMB, WMI began to reinvest in WMB to keep it afloat. However, WMI's investments came in slowly and constituted only a fraction of the dividends it had earlier taken out.
On the heels of those questionable dividend payments, WMI later withdrew from WMB approximately $4.0 billion in so-called "deposit funds" during the week before WMB's demise, when WMI should have been acting as a "source of strength" for WMB. Curiously, the settlement approved by the FDIC permits WMI to retain that windfall even in light of the subsequent announcement by the Office of Thrift Supervision that the primary cause of WMB's failure was the loss of $16.7 billion in deposits creating a run on the bank.
In Friday's announcement, the FDIC argued that by settling now it would avoid costly litigation which could last for years, implying some benefit to the taxpayers. However, the WMB receivership has $1.9 billion of non-taxpayer funds to support the pursuit of claims, more than enough to cover any conceivable legal budget. It appears that the FDIC's motivation for entering into this proposed settlement may, at least in some measure, have been to avoid further scrutiny of how it handled this matter.
Despite assurances from senior FDIC officials during the fall of 2008 that all potential assets of the receivership would be aggressively pursued, the reality provides a stark contrast. Far from serving as an instrument to maximize WMB receivership estate value, the FDIC has failed to safeguard and promote the interest of the principal remaining creditors of the receivership and has failed to maximize estate value. This has been exacerbated by the FDIC's inability to effectively navigate the bankruptcy process.
Washington Mutual is the biggest bank failure ever. It will be a benchmark for how creditors are treated in large bank failures, and the message that will be delivered to investors, if this proposed settlement is consummated without significant improvement in the treatment of the WMB senior noteholders, is to avoid investments in bank-issued bonds.
Also issued on behalf of
Sean F. O'Shea, O'Shea Partners LLP, counsel for bondholders
SOURCE Boies, Schiller & Flexner LLP