~ WaMu Then' ... to WMIH-Corp, and WMI / WMIIC's Owners, As We Are Now ~
I have kept the following letter close, quiet, never before presented, and since the very beginning days' ... The following, was a large part of the basis and the beginning of all of the study, research, and due diligence for me' ... this letter motivated me to the result ...
going back to a pre-seizure study, then to the study during the Two' Bankruptcies, ... through the D.C. Litigation, ... to now the present, ... now that we have witnessed Both' WMI I, and WMI II achieve a ... Settled Result ...
To those that have stayed true and truthful, please enjoy the following, as I have my friends, ...
In the ten days leading up to the largest bank failure in U.S. history, in the midst of a plunging stock price and negative headlines, Washington Mutual experienced a fatal “run on the bank” as paranoid customers withdrew more than $16 billion of deposits. On September 25, 2008, the regulators seized WaMu Bank, the primary operating subsidiary of the holding company, and on the same day, in an FDIC-brokered transaction, JPM purchased the assets and assumed all of the deposits of the bank in exchange for a $1.9 billion cash payment. Left behind were $13 billion of bonds at the bank subsidiary and $7 billion of bonds at the holding company, all trading at extremely distressed levels. Also left behind were all of the assets of the holding company, which were lying outside the jurisdiction of the FDIC. The crown jewel was roughly $4 billion of cash at the holding company that was held on deposit at WaMu Bank (and its subsidiary) prior to its failure. This was subsequently assumed by JPM as part of its deal with the FDIC to assume all deposit liabilities. Because WaMu’s consolidated financial statements eliminate this intercompany balance, many investors did not initially realize that this value existed. And even those that did, worried that the Bank or JPM might find a way to latch onto the cash. Other non-cash sources of value include a sizeable tax refund from the IRS, a liquid securities portfolio, several wholly-owned subsidiaries which generate positive net income, and potential proceeds from a number of material lawsuits with third parties.
By locating and studying numerous documents, such as public financials, bankruptcy documents, regulatory filings, monthly operating reports, state filings for the insurance subsidiaries, litigation pleadings, etc., we were able to identify these sources of value and take advantage of unprecedented fear and dislocation in the markets to build a position in holding company senior and subordinated bonds at attractive prices. At the beginning of the case, we took severe haircuts on possible valuation because of the tremendous lack of disclosure. But since that time, with each additional public disclosure, our understanding of each piece of value has become more thorough and granular, and the range of possible outcomes has continued to tighten to the upside. Although the absolute upside is less than it was a few months ago since bond prices are now higher, the primary risks to value erosion have also lessened materially in our minds, and we continue to believe that the overall risk-return is extremely good. As a bonus, in today’s investing environment where predicting a company’s “normalized” earnings and cash flows can often times feel like an exercise in futility, we very much like investments like this one which are market agnostic and have multiple analyzable aspects for us to dig our teeth into. It is worth noting that this investment process has been a team effort from the start, with numerous analysts and portfolio managers pitching in to help understand the various aspects of this case, from the bankruptcy process, to tax implications, to valuation of certain non-bank assets, etc. It is because of this, we believe, that we have largely been able to tune out the “consensus view” of this credit, appreciate it on a bottom-up basis as a unique, high-conviction investment opportunity, and size it accordingly.
