We'll have to disagree on the likelihood. However, I agree that if they lose they lose huge.

That's a reasonable take. However, JPM must at least CONSIDER the possibility of your scenario now. There is a chance they might negotiate earlier. If your scenario takes place, there will be blood in the water, and the unthinkable (from JPM's point of view) suddenly pops up on the radar.

In general, though, I agree that your take is the most likely: the POR will not consider equity (although there could be scraps just depending on how the waterfall flows). I just think the negotiation needn't wait until all the preliminary dominos have fallen.

Basically, JPM/FDIC have the most to lose BY FAR. As unlikely as it is they could lose (and it IS unlikely), they must consider the possibility. It's the same reason the Yankees shouldn't even play the Toledo Mud Hens. Nothing to gain, everything to lose, even if the possibility of loss is remote.

That's exactly my premise for being in this. JPM can relatively painlessly provide something that gives the prefs a generous payout (that would, in all likelihood be accepted), or this can go nuclear.

This is the easiest lever to push on. The tax refund split is a real head scratcher, and even if you do nothing more than give WMI a better split (let alone all of it, as they 'should' get), the P's see a nice recovery.

IMHO, this is where the negotiation turns. Anything further relies on litigation which is a crap shoot.

This is non-sensical. You don't understand leverage. Leverage is the use of other people's money, or else synthetic exposure (derivatives). If WAMU had 1.5 trillion in leverage, where did they get it? There would be either 1.5 trillion in liabilities on the balance sheet, or HUGE off-balance sheet exposure that we would all definitely know about. I've heard nothing about massive off-balance sheet derivative exposure.

I think you are basing your argument on a common mis-understanding of the money multiplier effect in banking. Yes, it is true that via fractional reserve banking banks can make loans of roughly 10x the amount that gets originally deposited in their bank. But they don't just 'get to do that.'

The way it works is this: someone deposits $100. On it's books the bank records a $100 liability. They also record $90 of cash to lend, and $10 that they must keep in reserves. They lend the $90. That borrower spends the money and it comes back to the bank from the seller. They deposit the $90. The bank records a NEW $90 liability, $81 in cash to lend, and an ADDITIONAL $9 in reserves. THe banks books now have $190 in liabilities, a $90 loan asset, $81 in a cash asset they could lend, and $19 held in reserve. Everything balances. This goes on and on, and at the end of the day, they've lent out $900, with $100 in reserves. BUT THEY ALSO HAVE $1000 in LIABILITIES.

What the bank CAN'T do is magically take in that $100 and immediately give someone a loan of $900. Where would the money come from?

This is a pretty sweet business because as you see, the bank doesn't have any of it's own money on the line. That's leverage. In reality, capital adequacy regulations ensure that the bank DOES have at least SOME of it's own money on the line, but I'm just keeping it simple here.

It's you who don't understand. The issue was SENIORITY. Depositors are the MOST SENIOR creditors. That's WHY they have nothing to do with the case, they KNOW they'll get their money back . Already DID GET IT BACK in fact (or at least know it's still there for them @ JPM). If that was not the case as VivaLasVegas suggested (Seniority shouldn't exist), they WOULD be in the case. Which would be RIDICULOUS.

Get it?

Yep. I fully understand why. Because depositors are effectively SUPER SENIOR. In return for measly interest rates on savings accounts, they get FDIC insurance. If they were NOT super senior (as VivaLasVegas seems to think they should be), they NEVER would have accepted those puny rates, because they'd be fighting for their piece of the pie like everyone else.

You don't seem to understand the suggestion that was made: that Seniority is bad. So answer me this: would you put your money in a bank savings account if a) FDIC insurance didn't exist and b) you did not have seniority over other creditors?

If the answer is yes, I'll gladly let you make a deposit at the Bank of Kirby96.

Good. I hope that means we'll have someone actively fighting for our interests. However, at the end of the day their challenge is to convince the court that there is more value than the MOR indicates. No one here seems to have any idea where such additional value might come from, people only say that they are sure it exists and the EC will miraculously find it.

I've said where I think the hope is: the EC puts pressure on that results in a more attractive split of the tax refund. Ad Nauseum, though: I'm merely hoping.

Hopefully true, Emphasis on 'hopefully'. Do you have any facts to back up a value of WMI that leads you to a higher recovery? Presumably, if you are correct, there must be something wrong with the MOR balance sheet, then. There must be more assets than they are reporting. Please tell me (seriously) where you think that error in the balance sheet is? Which line item is being underreported and why? If you give me a plausible story, I'll buy that recovery could be higher. All I can go on, though, is what WMI reports.

I'll tell you my thesis: I bought this knowing it was a cusp security (barely in the money) assuming that they'd get more of the tax refund. That's the only place I see wiggle room. You give WMI another 10% of the tax refund, and preferreds could see a decent payout. That's the only place I see a gain.

So hopefully that part of Friday's settlement is disputed. HOWEVER, that settlement as described included cessation of all litigation by WMI.

My take: we're down to attributing preferred value to the outcome of litigation (litigation which currently no party wishes to undertake). That's hardly a value based investment thesis. It's hope and nothing more.

All I know is what Note 1 to the MOR balance sheet says:

Upon a conversion event, the right hand (liability) side of WMI's balance sheet is grossed up by 3.9B for the trust preferreds. At the same time the asset side is grossed up for the investment in WMB, which is immediately written back down to zero:

"(b) an investment in subsidiary (i.e. WMB) of approximately $3.9 billion upon contribution of the Preferred Securities by WMI to WMB; and (c) an immediate and corresponding write-down of such investment in subsidiary."

Net result, claims against the estate rise by $3.9B, with NO corresponding increase in distributable assets.

I think that means there are $3.9B in additional claims going after a pie that is no bigger than it was before. I could be wrong.

You tell me what you think that means?

Umm folks, it IS in note 1 in the MOR balance sheet. That's an irrefutable fact. Whether it applies under Friday's settlement is another story, but there is absolutely no question that the MOR balance sheet note is consistent with what Puck50 reports.


I invested in this partly as a learning experience, and I'm definitely learning. I assumed this meant that these were somehow claims against WMB (as the 'debit' is an investment in sub). However, since investment in WMB is worthless, these are apparently general preferred claims against WMI. I see no reason why they would not be. The note explicitly states a write-down in the WMB asset, but does NOT mention anything other than an increase in preferreds on the right hand side of the balance sheet.

Gulp.

This is long, but notice the last paragraph in BOLD.
Per the 2/26 MOR:

"Note 1: Washington Mutual Preferred Funding

On September 25, 2008, the Office of Thrift Supervision concluded that an “Exchange Event” had occurred with respect to the following securities (the “Securities”):


·
Washington Mutual Preferred (Cayman) I Ltd. 7.25% Perpetual Non-cumulative Preferred Securities, Series A-1 (to be exchanged into depositary shares representing Series J Perpetual Non-Cumulative Fixed Rate Preferred Stock of Washington Mutual, Inc. (“WMI”));


·
Washington Mutual Preferred (Cayman) I Ltd. 7.25% Perpetual Non-cumulative Preferred Securities, Series A-2 (to be exchanged into depositary shares representing Series J Perpetual Non-Cumulative Fixed Rate Preferred Stock of WMI);


·
Washington Mutual Preferred Funding Trust I Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities (to be exchanged into depositary shares representing Series I Perpetual Non-Cumulative Fixed-to-Floating Rate Preferred Stock of WMI);


·
Washington Mutual Preferred Funding Trust II Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities (to be exchanged into depositary shares representing Series L Perpetual Non-Cumulative Fixed Rate Preferred Stock of WMI);


·
Washington Mutual Preferred Funding Trust III Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities (to be exchanged into depositary shares representing Series M Perpetual Non-Cumulative Fixed Rate Preferred Stock of WMI); and


·
Washington Mutual Preferred Funding Trust IV Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities (to be exchanged into depositary shares representing Series N Perpetual Non-Cumulative Fixed-to-Floating Rate Preferred Stock of WMI).

In accordance with the terms of the documents governing the Securities, the Conditional Exchange of the Securities occurred on Friday, September 26, 2008 at 8:00 A.M. (New York time). The documentation governing the Securities contemplates that at the time of the Conditional Exchange, each outstanding Security was intended to be exchanged automatically for a like amount of newly issued Fixed Rate Depositary Shares or newly issued Fixed-to-Floating Rate Depositary Shares, as applicable, each representing a 1/1000th interest in one share of the applicable series of preferred stock of WMI. If and until such depositary receipts are delivered or in the event such depositary receipts are not delivered, any certificates previously representing Securities are deemed for all purposes, effective as of 8:00 AM (New York time) on September 26, 2008, to represent Fixed Rate Depositary Shares or Fixed-to-Floating Rate Depositary Shares, as applicable.

WMI and its advisors are currently assessing a number of legal, accounting and tax issues related to the Securities and the transactions related to the Conditional Exchange. Because of these unresolved issues, WMI has not yet reflected the Conditional Exchange and/or its attendant transactions on its financial statements, including any possible interests (direct or indirect, contingent or otherwise) in the Securities and the assets, as the case may be, of Washington Mutual Preferred Funding LLC.

Assuming that the Conditional Exchange had been completed in accordance with the terms of the relevant documentation, on a pro forma basis, WMI’s financial statements would reflect (a) a credit to shareholders’ equity of approximately $3.9 billion upon issuance of the new classes of preferred stock; (b) an investment in subsidiary (i.e. WMB) of approximately $3.9 billion upon contribution of the Preferred Securities by WMI to WMB; and (c) an immediate and corresponding write-down of such investment in subsidiary."

Wow. Do you have any more color on this?

If true, this sucks. Turn that potential 15-20 cent recovery into a 7-10 cent recovery, which, of course would make a trading level of 40 make a whole lot of sense. Ouch.

Yes. In a sense that I'm adding and subtracting from the MOR based on it. The real point, though is that this is a $9B balance sheet. Even if you crank up the numbers in the proposed settlement considerably (say, add another $1B) you are still in what i consider the 'error bars'. A 10% swing in the value of the estate (which could easily just 'happen' when we move from accounting values to realizable values) will be $900MM to $1B, or around 30 cents to the preferreds. Given that they are currently on the cusp, even a 'more attractive' offer COULD see them worthless (or, worth much more). The value to these is 0 to 15 with very low associated certainty. There are scenarios where they are worth 30 or WAY out of the money. The current trading levels (say, 3-5 cents) are probably as good as the market can do in weighing the potential outcomes. It really seems quite reasonable (unfortunately. I'm in at higher levels).

Apologies to the commons, but I just don't see how there is value there even if you do beef up the 'settlement' considerably.

The only way the common is in the money is if they hit a litigation home-run. Personally, I would never gamble on litigation outcome, but that's what an investment in the commons is: a litigation lottery ticket. It's certainly not anything of tangible value.

Oh. Sorry. It's just that MY numbers actually DO support a recovery of around 10 cents as a mid case.

I'd love to see the numbers that support an 88 cent recovery. Care to post them?

I'm at 15 cents as UPSIDE. Downside = 0. Current trading level is probably accurate given the uncertainty.

Why this is iffy:

I'm a holder, not a basher, but after the 'settlement' on Friday, I'm not as confident as I once was.

Assets per MOR = 6.9B

This includes the 4B deposit

Add-On Tax Asset ~ 2B

Assets = 8.9B

Liabilities = 8.3B

Sounds like JPM might take on some of these, any estimates out there?

so $600MM or more to Prefs, or 17 cents +, right? Not bad when trading at ~60.

BUT... there are $1.4B in "Investments in Subs". $100MM in "Other Assets"

These are the funny money of accountants. Professional distressed investors would discount these numbers HEAVILY. Suddenly P's don't look so good. If you are relying on those values to equate to the actual distributable value you are making a BIG assumption. Could be higher could be MUCH lower. Who knows?

Bottom line: payout to P's ranges from 0 to maybe 30 cents? Given the uncertainty, this trading level is probably about right.

Hope for the best, prepare for the worst.

The distressing thing is the tax refund settlement. My base case recovery was 20-30 cents, and in my model, getting 2/3 of the tax refund (not just one third as today's announcement alludes) gets you there. Now my base case is a 5 cent recovery ($50 per P). 10 cents might be possible, but that's now the high case.

There seems to be a lot of people invested in this stuff that don't understand what they are in.

These are cusp securities. They could be worth nothing or $1000 based on a relatively SMALL swing in the overall value of estate.

Why didn't WHO stop trading? These trade on the pink sheets, not an exchange! There's NO ONE to stop trading other than those making markets. The main market maker probably DID stop trading and all that was left was some pissant with a super low bid that caused a rush to the exits.

It's not over by any stretch. But this can (and always had the potential to be) a DONUT. It could also be several hundred bucks. Invest at your own risk.

LOL. Buy the rumor sell the news!

Anyone have ANYTHING even remotely resembling analysis?

Yeah it is complicated. The age old question, is a preferred debt or equity? Did folks invest $1000 in a debt instrument, or did they buy some multiple of equity?

While the prospectus clearly comes in on the equity end, in the case of BK or re-structuring I gotta think it's more like debt (or else I made a mistake in investing here) simply because there's unequivocally someone below you. Assuming there is value left after senior creditors get paid, if one argues a preferred claim amount is determined by some equation applied to equity value at an arbitrary point in time they are de-facto saying a preferred is pari to equity (i.e. if the notional value of a preferred claim is X*equity value, ANY payment to the preferred implies the common has value). This just seems patently incorrect. I think it's more likely the court says, "preferred holders gave $1000 to the firm that enjoyed seniority over the common and did not have the potential to participate in the upside that the commons did. Therefore that constitutes a $1000 claim that is senior to the equity, and we're gonna pay them xx% of that $1000."

I guess what I'm saying is it would seem odd for the value of a preferred to drive the claim amount and thus the recovery amount. Distressed debt trades at levels far below the claim or recovery amount all the time. The instruments value and claim are unrelated (unless, perhaps, it's actually equity, see above).

Right, my bad. They have a "liquidation preference". However, the price at issue was $1000.00. Regardless of how many shares that equates to in some valuation exercise, it's pretty apparent that $1000 per is your claim against the issuer, is it not?

Long time lurker and P owner here with another thought on this:

I'm not an attorney, but this also sounds a lot like it meets the definition of an ipso facto clause, which is explicitly UNENFORCEABLE in a bankruptcy, even though all contracts have them (i.e. you can't override the distribution of assets that a court finds equitable simply because you wrote it up in an agreement prior). People thinking that P's will get par because the commons are trading as if they will see something could be disappointed. This is gonna be a negotiated settlement. The equity could get a tip while the P's collect well below par. Any BK attorney's out there?