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WaMu Set To Sue (WAMUQ)
March 23, 2009 | By Derek Simon
There's an old saying: "If it looks like a duck and acts like a duck … it's probably a duck." Yet, as most of us know, not everything is what it appears to be. In other words, one person's omelet is another person's brain on drugs (as I learned from those illuminating public service announcements of the late 1980s).
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So, when the Office of Thrift Supervision shut down Washington Mutual Bank on September 25, 2008, and handed its assets over to the Federal Deposit Insurance Corporation (FDIC), which subsequently sold them to JPMorgan Chase (NYSE:JPM) for $1.9 billion. It could have been that JPMorgan had just been the fortunate recipient of an uncommonly good opportunity, but the deal still had an air of quackery.
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When I learned that government officials had made the deal in private, I was even less certain that I'd seen a duck, especially in light of the fact that JPMorgan Chairman and CEO James Dimon had made no secret of his desire to obtain the banking behemoth.
"We are building a company," Dimon told the New York Times shortly after the sale. "We are kind of lucky to have this opportunity to do this. We always had our eye on it."
And with good reason, it would seem. With $307 billion in assets at the time, Washington Mutual Bank was the largest savings and loan in the country. By way of comparison, IndyMac Bank (OTC:IDMCQ) had just $32 billion in assets when it was shut down. Yet IndyMac, which was purchased by a seven-member group of investors headed by Steven T. Mnuchin, co-chief executive of Dune Capital Management, and Michael Dell, the founder of Dell Inc. (Nasdaq:DELL), sold for $13.9 billion. It reminds me of those old V8 commercials: I picture Mnuchin and Dell slapping their foreheads, exclaiming, "We could've had a Washington Mutual."
Rush to Judgment?
Not surprisingly, the "Blue Light Special" that JPMorgan appears to have received on the Seattle-based bank did not escape the notice of many past and present shareholders of its parent company, Washington Mutual Inc. (OTC:WAMUQ), which was forced to declare bankruptcy immediately following the sale of its largest subsidiary. On Friday, WaMu's bankruptcy counsel sued the FDIC for a reported $17 billion plus damages, alleging "fraudulent conveyance", among other things. (Find out why this corporation was developed and how it protects depositors from bank failure in The History Of The FDIC.)
Debt and Taxes
Still, it's hard to say what effect a lawsuit will ultimately have. To begin with, there is the question of how much Washington Mutual is actually worth these days. A story that ran in the Puget Sound Business Journal on October 2, 2008, asserts that "at least part" of the $32.9 billion in assets listed in WaMu's Chapter 11 bankruptcy filing is company stock - stock that is now trading for less than the price of a half-dozen thoughts. That's about 6 cents per share for those in desperate need of a decimal point, up from around 4 cents per share on March 20. What's more, in addition to the $8.2 billion in debt that Washington Mutual acknowledged at the time it went belly-up, the IRS claims the company owes another $12.5 billion in back taxes, although WaMu disputes this.
It gets worse.
The state of Washington also wants cash from WaMu, as it seeks $24.1 million in unpaid sales and business taxes. Heck, even Microsoft (Nasdaq:MSFT) has gotten into the act.
"We have existing contracts for software licenses and consulting services with Washington Mutual and we want to make sure those contracts are properly administered through the bankruptcy process," Microsoft spokesman David Bowermaster told the Puget Sound Business Journal following the software giant's October court filing.
Fighting the Feds
Then, of course, there is the issue of winning a lawsuit against a federal agency - a David versus Goliath type of endeavor in which David is limited to spit balls rather than stones.
"Congress gave the FDIC authority to take over banks," noted Steve Berman, a managing partner of Hagens Berman Sobol Shapiro LLP, in the October 9 edition of the Seattle Post-Intelligencer. "I can't imagine there would be an avenue to sue them."
Nonetheless, there is a precedent for such legal action. In 1993, The First City Bancorporation of Texas filed a $3 billion suit against the FDIC arguing that it "had acted arbitrarily by declaring the banking company insolvent in October 1992 and seizing its assets," the New York Times reported. First City Bancorp and the FDIC later reached an undisclosed settlement.
Unlike the WaMu case, however, the FDIC sold the First City banks for $430 million more than the value of its deposits. "That helped cut our costs a great deal," Andrew Porterfield, a spokesman for the FDIC told the Times. (Find out how these government agencies govern the financial markets in Financial Regulators: Who They Are And What They Do.)
The Last Word
So what does a lawsuit mean to Washington Mutual bondholders and shareholders? Well, for the former, the effect would seem to be negligible, at least until all the various creditors' claims are sorted out. The latter, however, could see a bump in share prices, especially if WaMu is granted a jury trial as it has requested.
Investors who've watched their portfolio values erode quicker than dignity on a reality television program aren't complaining. After all, a penny earned is a penny saved.
By Derek Simon
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