...that the Examiner asked to see, but was denied.
Those elusive “retained assets” the examiner asked to see, but was denied.
...the Court transcripts re: such topic and the extracts from the Examiner's Report (now called upon), weighs in as follows:
25 Your Honor, what we have done is we have prepared a
1 middle ground, what I would contend to be a middle ground. And 2 due to the lateness of the filing by the equity committee 3 yesterday, the FDIC yesterday, negotiations that still happened 4 and working with our committee, we hadn't filed it yet. But we 5 have here today, Your Honor, a proposed order. And what I'd 6 like to do is talk about the proposed scope. The proposed 7 scope that we have in our order that we've worked out says the 8 following; it's fairly short: "The Examiner is directed to 9 examine", and the defined term here, "(the 'Investigation') 10 (a): the claims and assets asserted to be property of the 11 Debtors' estates that are proposed to be conveyed, released or 12 otherwise compromised and settled under the Plan and Settlement 13 Agreement, including all Released Claims, as defined in the 14 Settlement Agreement, and the claims and defenses of third 15 parties thereto," and we define that as the "Settlement 16 Component".
17 Moving on, the next step is part (b), and that would 18 be "such other claims and causes of action which shall be 19 retained by the Debtors, and the proceeds thereof, if any, 20 distributed to creditors and equity interest holders pursuant 21 to the Plan, and the claims and defenses of third parties 22 thereto," and we've defined that as the "Retained Asset 23 Component" . 24 And one final clause: "provided, however, that the 25 foregoing is without prejudice to the Court to modify the
1 foregoing scope of the investigation in the event that the 2 Court otherwise deems appropriate." 3 Your Honor, we think that this would be an appropriate 4 scope for the examiner. We do think that really the most 5 important aspect is what did the debtors do in these issues 6 that we've highlighted of whether there was any collusion, 7 whether there were conflicts of interest that were 8 inappropriate, whether there was an exercise of business 9 judgment. But then if we do start moving into the assets and 10 the causes of action, what is most important is what is in our 11 clause (a), and that is, what is to be comprised, what is to be 12 settled, what is to be conveyed. 13 We also have in there the part (b) of what is to be 14 retained, and that is because in negotiations that we had with 15 all of the settling parties, with the equity committee last 16 week, with the FDIC, we did talk a great deal about the concept 17 of the retained assets. Now, it's my position, Your Honor, 18 that the examiner doesn't need to do much with the retained 19 assets other than say the assets are retained and therefore the 20 liquidating trust can go ahead and pursue them. They will 21 still be there; they can be carried through. But I understand 22 that the equity committee is very interested in having a 23 neutral third party do an investigation of those retained 24 assets. And if that's what they'd like, then that's going to 25 be fine with us as well. So in our proposed middle ground we
1 do have this clause (b) with respect to the retained assets 2 component. 3 However, it's very important not to lose sight of the 4 timing, again. And so what we've built into this order as well 5 is a mechanism where the report of the examiner would be 6 divided into two parts, or it could come in two chapters: The 7 first would be the issues that are necessary on the settled 8 assets component for purposes of voting under the plan, and 9 then we provided in our proposed time frame that three weeks 10 later the examiner could produce the second chapter of the 11 report on the retained assets, so that the examiner would have 12 a little bit more time to work on the retained assets after 13 getting the part finished on the settled assets. 14 So, Your Honor, if I may approach, I'd like to offer 15 up the proposed agreed order that the creditors' committee 16 would like to offer, and I have copies available for everyone 17 here.
22 MR. NELSON: And obviously it's just with respect to 23 that paragraph 2 on scope, but as we'll see Your Honor it's 24 quite limited and mostly just word changing, changing 25 examination to investigation. Changing assets asserted to be 1 property to assets that may be property of the estate and 2 adding an "and/or" to the clause and the word assets to what 3 would be the retained asset component. And I believe that with 4 this, at least on scope, there is agreement on where we are on 5 what the examiner should be investigating.
EXAMINERS REPORT – PAGE 1
With respect to the Settlement Component, the Examiner concludes that the proposed Settlement reasonably resolves contentious issues. With respect to the Retained Assets Component, the Examiner concludes, based on currently available facts, that the value of retained assets is not material. 2
2 As explained in the Proposed Releases section of this Report, the releases in the version of the Plan reviewed by the Examiner are overly broad, raising substantial issues concerning the extent of the retained claims.
C. Inadequate Disclosure and Analysis of Other Assets
The Equity Committee maintained that the Debtors have insufficiently analyzed the value of potential tort and contract claims that will be released and the value of the Retained Assets that will not be released in the Settlement Agreement. Examples of assets that Equity believes have not been fully analyzed are: WMMRC, future NOL tax benefits, certain potential claims that arc released against JPMC and the FDIC, and certain retained claims.
D. Challenges in Reaching Equity
As part of his Investigation, the Examiner evaluated the impediments to obtaining through litigation sufficient funds to make distributions to Shareholders. The Settlement creates the appearance that WMI settled for just enough to pay unsecured creditors. Shareholders, who receive nothing in the Settlement, understandably believe that better results could be achieved through litigation.40
The Examiner finds that it is highly unlikely that there is any scenario which will result in substantial distributions to Shareholders. The following chart shows the classes (in order of priority) and amounts of the various classes of claims.
Setting aside any potential claims by JPMC or the FDIC against WMI, WMI would need to recover $16 billion in order to satisfy all creditor claims and preferred shareholders just to reach the common shareholders. Given the more than 1 billion outstanding shares of WMI common stock, it would take substantially more to make any meaningful distribution to them. Nevertheless, the Examiner has attempted to determine whether there are sufficient assets or claims which could be recovered to generate such large recoveries.
Equity argues that substantial assets being transferred to JPMC are assets which rightfully belong to WMI. Equity also argues that there are claims against JPMC which should be pursued and not released. The Examiner has carefully considered both arguments. Without a settlement, the WMI estate will hold approximately $900 million. The Examiner is advised that the Settlement will fail if any one asset is removed. Thus, in order to properly evaluate the likelihood of reaching Shareholders, one must assume that there will be no settlement and that the Debtors would have only the $900 million. Assuming that the WMI Estate could recover the Deposits, which is likely but not certain, the Estate would have just under $5 billion.
Given that common shareholders are $16 billion out of the money, the additional $11 billion that would put them in the money would have to come from other assets. However, the Tax Refunds cannot be recovered without generating offsetting claims by WMB for its portion pursuant to the Tax Sharing Agreement. Similarly, although the BOLi/COLI represent a valuable asset, the vast majority of these assets belong to WMB. The Avoidance Actions are unlikely to lead to any substantial net recoveries. The same is true with respect to any attempt to set aside the transfer of the TRUPS to WMB. The Examiner concludes that there is no reasonable likelihood that any combination of the assets that could be recovered for the benefit of the Estate will result in sufficient funds to place Shareholders "in the money."
The reality is that it would only be possible to reach common shareholders if WMJ could successfully bring very large tort claims against either JPMC or the FDIC, which would result in the recovery of multiples of billions of dollars. The primary problem with such claims is that potential acquirers of WMI or WMB were not discouraged from bidding because of any actions of JPMC. Rather, other likely bidders were fearful of the potential losses in the WMI mortgage loan pools and were unwilling to assume those risks. As to the FDIC, there are substantial legal hurdles to asserting any claims against the agency in connection with the sale of WMB.
Finally, both JPMC and the FDIC have filed substantial claims in this case for many of the assets identified above. The FDIC has filed a claim for all transfers made by WMB to WMI, which total $17 billion. Even assuming that many of these claims arc overstated, it is clear that voiding the Settlement Agreement and litigating all claims could result in substantial claims back against WMI by JPMC and the FDIC.
Simply put, there is no clear litigation path which would result in substantial recoveries beyond those to be paid to the Debtors under the Settlement Agreement. Indeed, a possible result if the settlement fails is that the Debtors will end up with the Deposit Accounts and nothing more. The amounts required to reach common equity are simply too large, and the likely recovery too speculative, to justify rejecting the proposed Settlement.
E. Conclusion This Report does not answer all the questions that Equity and individual shareholders posed. It does, however, analyze most of the issues as to which Equity had questions. The Report details the relevant history leading up to WMB's seizure. The Report analyzes what it would take for Shareholders to receive a distribution. It analyzes the value of the principal components of the proposed Settlement, including the Deposit Issue, Tax Refunds, TR UPS, BOLi/COLI, and Avoidance Actions. The Report analyzes significant potential claims against JPMC and government regulators. Included in each analysis of an asset or a potential claim is a discussion of the pending legal proceedings contesting ownership of the asset. The assets included in the Settlement Agreement have been the subject of contentious litigation. As to many of the assets, there is litigation risk for each party depending on a court's decision in pending proceedings, appeals, and possible collateral jurisdictional attacks.
Pursuant to the proposed Plan and Settlement Agreement, WMI preferred shareholders are at least $500 million "out of the money" and WMI common shareholders arc at least $7 billion "out of the money." There is a small chance of modest distributions to some Preferred Shareholders but virtually no chance of distributions to Common Shareholders.
After substantial investigation, the Examiner concludes that it is highly unlikely that these results can be materially improved by voiding the Settlement Agreement and attempting to achieve greater recoveries through litigation. The Examiner concludes that there is no reasonable likelihood that any combination of the assets that could be recovered for the benefit of the Estate will result in sufficient funds to place Shareholders "in the money." Stated another way, the Debtors are unlikely to prevail as to many of the asset disputes, and even if the Debtors do prevail, the end result will be the assertion of additional claims against WMI that will take precedence over Shareholders.
The Examiner also concludes that no known facts establish that the government acted in bad faith in seizing WMB. Several former WMI and WMB officers and others informed the Examiner that they did not consider the seizure of the bank to be unreasonable or arbitrary. WMB was seized in the midst of a series of unprecedented failures in the banking and financial sectors. The potential ramifications of these failures were not fully known or understood. This uncertainty resulted in a singularly important fact: JPMC was the only financial institution willing to take over WMB's assets and assume its eroding loan portfolio without significant government guarantees.
The FDIC was concerned with protecting its insurance fund and took steps it believed were reasonable to protect the fund. JPMC's acquisition of WMB's assets did protect the fund. Moreover, even assuming that the Government made a bad decision in seizing WMB, there is no practical way to undo what has been done. The statutory protections afforded the FDIC, and through them, purchasers of failed institutions, significantly limit civil remedies against the FDIC and JPMC in these circumstances.
Although the Examiner is sympathetic to Equity's views, the Examiner finds no remedy that will enable the Debtors to obtain sufficient assets for a distribution to Shareholders. It is highly unlikely that the OTS and FDIC decisions to seize WMB and sell it to JPMC can be successfully challenged. Jn any event, it appears that their decisions were reasonable under the circumstances.
Equity also questions why JPMC paid less than $2 billion for WMB assets when it had been willing to pay billions more months earlier. The Examiner concludes, however, that no other bank was willing to buy all WMB's assets at any price without government guarantees concerning downside risk. Although JPMC may end up profiting greatly from the WMB purchase, that final chapter has not yet been written.
