Washington Mutual was a thrift holding company that had 133
subsidiaries. These subsidiaries included Washington Mutual Bank,
which was the largest savings and loan association in the United
States prior to its failure, with more than 2,200 branches and $188.3
billion in deposits, according to the confirmation opinion of the U.S.
Bankruptcy Court of the District of Delaware.[Footnote 127] Washington
Mutual Bank conducted most of Washington Mutual, Inc.'s primary
banking activities. Washington Mutual Bank had more than $300 billion
in assets at the time of its failure and a large subsidiary of its
own, called Washington Mutual Bank, FSB.[Footnote 128] The Office of
Thrift Supervision (OTS) was the primary regulator for Washington
Mutual Bank and Washington Mutual Bank, FSB.[Footnote 129] Washington
Mutual also had several nonbanking subsidiaries, including two captive
reinsurers, several mortgage companies, and several real estate
companies. At the time of filing, Washington Mutual had approximately
$32.9 billion in total assets and total debt of approximately $8.1
billion. Washington Mutual's common stock was listed on the New York
Stock Exchange and traded at its highest level of $46.55 per share in
January 2006 for a total market capitalization at that time of $44.9
billion.
Washington Mutual Bank was the largest bank failure in U.S. history.
According to the joint report of the Offices of Inspectors General for
the Department of the Treasury and FDIC on regulatory oversight at
Washington Mutual Bank, Washington Mutual Bank had weak risk
management and pursued a strategy to pursue growth through
originating, acquiring, securitizing, and servicing nontraditional
loan products and subprime loans.[Footnote 130] This strategy broke
down when housing and mortgage markets began to collapse in mid-2007.
Until late 2007, Washington Mutual Bank remained profitable, but loan
losses caused earnings to decrease 73 percent from the second to third
quarter of 2007. Further loan losses and chargeoffs caused Washington
Mutual Bank to post $1 billion in losses in both the fourth quarter of
2007 and the first quarter of 2008.
In March 2008, Washington Mutual began seeking additional capital.
According to the report of the court-appointed examiner for the
bankruptcy case and the Inspectors General's report, the holding
company received a capital infusion of about $7 billion from TPG
Capital (formerly known as the Texas Pacific Group) in April 2008,
part of which went to Washington Mutual Bank and part of which was
used to pay down Washington Mutual's debt.[Footnote 131] However,
Washington Mutual Bank continued to suffer from significant depositor
withdrawals as the housing market further deteriorated and IndyMac,
FSB failed in July 2008. Washington Mutual Bank was a member of the
Federal Home Loan Bank of San Francisco, which also began to limit
Washington Mutual Bank's borrowing capacity.[Footnote 132] Following
company share price declines, Washington Mutual appointed a new chief
executive officer on September 7, 2008. However, after the collapse of
Lehman on September 15, 2008, Washington Mutual Bank had a net deposit
outflow of $16.7 billion (or more than 9 percent of total deposits)
and experienced a second liquidity crisis. According to the Inspectors
General's report, the bank was further hindered by its borrowing
capacity limits, share price decline, portfolio losses, and other
restrictions tied to the $7 billion capital investment.
By September 23, 2008, OTS had found that Washington Mutual Bank had
$4.6 billion in cash to meet its liquidity obligations, and its
expected earnings would be insufficient to supplement its cash base.
OTS began preparations to take over Washington Mutual Bank and appoint
FDIC as the receiver. FDIC opened its Web site for potential bids for
the bank. On September 24, JPMorgan Chase and Co. (JPMC), Citigroup,
Inc., and Wells Fargo & Company each submitted bids to purchase
Washington Mutual Bank, but both Citigroup's and Wells Fargo's bids
did not meet FDIC's bid requirements. At the same time, the holding
company's management was pursuing other alternatives to gain liquidity
without a buyout, including using other assets to pledge as collateral
to receive funding from the San Francisco Federal Home Loan Bank and
the Federal Reserve Bank of San Francisco, according to the examiner's
report. On September 24, Washington Mutual staff presented these
alternatives to OTS but did not get a response. On Thursday, September
25, OTS found Washington Mutual Bank to be unsafe and unsound and
appointed FDIC as receiver. FDIC then sold substantially all of
Washington Mutual Bank's assets to JPMC through a purchase and
assumption agreement for $1.88 billion.[Footnote 133]
The Bankruptcy:
On September 26, 2008, Washington Mutual, Inc. filed a petition for
relief pursuant to Chapter 11 of the Code. The filing for bankruptcy
was completed the day after the closure of Washington Mutual Bank.
Washington Mutual filed for bankruptcy to receive automatic stay
protection against the seizure or dissipation of the holding company's
remaining assets. The holding company's representatives maintain that
they did not know which assets were transferred to JPMC when the bank
was sold because they did not have access to the purchase and
assumption agreement between FDIC and JPMC, so they wanted to maintain
control over the remaining assets. The holding company's subsidiary
WMI Investment Corp. also filed for Chapter 11 protection on September
26, and these cases were administratively consolidated into one case.
After filing its bankruptcy petition in September 2008, Washington
Mutual's estate sought to recover $4 billion in deposits and other
assets from FDIC that it said were on deposit with a subsidiary of
Washington Mutual Bank (Washington Mutual Bank, FSB). FDIC denied all
of Washington Mutual, Inc.'s claims in a letter dated January 23,
2009. The holding company sued FDIC to return its deposits, among
other reasons, while JPMC also sued Washington Mutual, seeking
judgment that the funds (and other disputed assets) belonged to them
as a cash infusion the holding company made to the bank to maintain
the depository institution's capital levels. When the depository
institution and holding company became eligible for more than $5
billion in tax refunds as the result of a change in federal tax law
related to the carrying forward of more than $14 billion in past
losses, Washington Mutual, JPMC, and FDIC were able to come to an
agreement in 2010 on how to split those proceeds, which would provide
the holding company with value from the refunds.[Footnote 134] This
agreement is discussed in greater detail later in this appendix.
Nevertheless, Washington Mutual's shareholders were not satisfied with
the settlement and sought review by a court-appointed examiner. The
shareholders expressed disapproval of the global settlement plan and
raised concerns about the failure of Washington Mutual Bank, including
whether it was improperly assessed as unsafe and unsound or sold to
JPMC for less than fair market value. In January 2010, the U.S.
Trustee's Office appointed the official Committee of Equity Security
Holders. In April 2010, the committee filed a motion for the
appointment of an examiner because the debtors and the creditors'
committee refused to provide equity holders with information. On July
28, 2010, the bankruptcy court approved the appointment of an
examiner, selected by the U.S. Trustee's office, to investigate the
claims of various parties that were addressed by the global
settlement. The examiner's report reviewed key issues related to the
global settlement agreement including the disputed assets as part of
the sale and was issued on November 1, 2010. While the examiner's
findings supported a determination that the settlement agreement was
fair and reasonable, the Bankruptcy Court for the District of Delaware
did not allow the report as evidence because the judge found the
report to be based mostly on hearsay, and officials commenting in the
report were not available to testify.[Footnote 135]
In January 2011, the bankruptcy judge in the Washington Mutual
proceeding entered an order denying confirmation of the proposed plan
of reorganization, which incorporated the global settlement.[Footnote
136] Although finding that the global settlement of claims was fair
and reasonable and provided a basis for confirmation, the judge
concluded that the plan did not adequately address the terms of a
global settlement of various claims by creditors and some
shareholders. The judge also found that the plan was not confirmable
unless certain deficiencies were corrected. After the order was
issued, the interested parties pursued a revised plan. Confirmation
hearings in the case have been repeatedly delayed, but could take
place as early as July 2011.
Table 5: Timeline of Selected Events Related to the Washington Mutual,
Inc. Bankruptcy, from September 2008 through July 2011:
Key date: Sept. 25, 2008;
Event or activity: OTS finds Washington Mutual Bank to be unsafe and
unsound and appoints FDIC as receiver. FDIC facilitates the sale of
Washington Mutual Bank to JPMC for $1.8 billion and assumption of
liabilities.[A]
Key date: Sept. 26, 2008;
Event or activity: Washington Mutual, Inc. files for bankruptcy
protection in the U.S. Bankruptcy Court in Delaware.
Key date: Oct. 3, 2008;
Event or activity: First day of bankruptcy court hearing.
Key date: Dec. 30, 2008;
Event or activity: Washington Mutual, Inc. files proof of claim with
FDIC related to the Washington Mutual Bank receivership.
Key date: Jan. 23, 2009.;
Event or activity: FDIC denies all of the debtors' claims.
Key date: Mar. 20, 2009;
Event or activity: Washington Mutual (debtor) files suit in the D.C.
District Court against FDIC regarding $4 billion in assets FDIC
transferred to JPMC.
Key date: Mar. 24, 2009;
Event or activity: JPMC files suit against Washington Mutual in U.S.
Bankruptcy Court in Delaware over disputed assets in an adversary
proceeding.
Key date: Nov. 6, 2009;
Event or activity: Enactment of the Worker Homeownership and Business
Assistance Act of 2009 permits businesses to use 2008 net operating
losses to receive refunds on taxes paid in prior years.[B]
Key date: Mar. 12, 2010;
Event or activity: Washington Mutual, FDIC, and JPMC announce that
they have reached a settlement regarding the disputed property and
claims (called the global settlement).
Key date: Apr. 12, 2010;
Event or activity: Parties displeased with the global settlement
(which included allocation of the tax refunds) file an adversary
proceeding in the U.S. Bankruptcy Court in Delaware.
Key date: May 21, 2010;
Event or activity: Washington Mutual, Inc. files amended plan of
reorganization and disclosure statement reflecting agreements reached
with FDIC and JPMC.
Key date: July 6, 2010;
Event or activity: Parties displeased with the global settlement file
a different adversary proceeding in the U.S. Bankruptcy Court in
Delaware (known as the Trust Preferred Securities adversary
proceeding).
Key date: July 28, 2010;
Event or activity: The U.S. Bankruptcy Court in Delaware approves the
U.S. Trustee's selection of an examiner to conduct an investigation
into the merits of the various claims of the estate, JPMC, and FDIC
which were being resolved by the global settlement. The examiner
completed his report on November 1, 2010.
Key date: Oct. 6, 2010;
Event or activity: Modification of global settlement plan.
Key date: Jan. 7, 2011;
Event or activity: Denial of summary motion April 12, 2009, adversary
proceeding.
Key date: Mar. 30, 2011;
Event or activity: Approval of disclosure statement and solicitation
procedures for revised plan.
Key date: July 13, 2011;
Event or activity: Scheduled date of confirmation hearing for plan.
Sources: Judicial filings and decisions from the U.S. Bankruptcy Court
of the District of Delaware, FDIC, and OTS.
[A] The sale resulted in a closed bank transaction with no losses to
the deposit insurance fund.
[B] Pub. L. No. 111-92 § 13 (2009) allows firms to apply losses in
2008 and 2009 to their taxable income for up to 5 prior years (with a
limited amount for the fifth prior year), instead of the 2 years
otherwise generally allowed.
[End of table]
Adversary Proceedings:
Washington Mutual, Inc. and JPMC:
Shortly following the sale of Washington Mutual Bank to JPMC,
Washington Mutual filed a proof of claim with FDIC as receiver to
recover about $4 billion in deposits allegedly held by the holding
company in a subsidiary of Washington Mutual Bank. According to
representatives of the holding company, the holding company was the
largest creditor for the receivership and followed timelines for an
appeal of FDIC's decision to transfer the holding company's assets.
FDIC denied the claim in a letter dated January 23, 2009, and
Washington Mutual then sought an appellate review.
As discussed earlier, on March 20, 2009, Washington Mutual filed suit
in D.C. District Court against FDIC, asserting that FDIC: (1) should
review its denial of Washington Mutual's claims; (2) wrongfully
dissipated Washington Mutual Bank's assets; (3) took Washington
Mutual, Inc.'s property without just compensation; (4) should convert
Washington Mutual, Inc.'s property back to the holding company; and
(5) should void its prior disallowance of Washington Mutual, Inc.'s
claim to the deposits. This filing became known as the WMI action.
Representatives of the holding company told us the holding company
took a portion of the funds it raised in April 2008 and put it in a
deposit account at a subsidiary of Washington Mutual Bank, called
Washington Mutual Bank FSB, which also was seized by regulators. By
the end of the second quarter of 2008, $5 billion of the funds from
TPG Capital went into Washington Mutual Bank. Representatives of
Washington Mutual told us they filed in the D.C. District Court
because FDIC's main office is located there, and the challenged action
occurred there.
Four days later, JPMC filed a complaint in bankruptcy court against
Washington Mutual, Inc. (known as the JPMC adversary proceeding)
seeking a declaratory judgment that JPMC owned the deposited funds
contested by Washington Mutual, Inc. JPMC maintained that the funds
were a capital contribution to the bank rather than a deposit.
[Footnote 137] JPMC and FDIC further questioned whether the deposits
were a fraudulent transfer.[Footnote 138] On May 29, 2009, Washington
Mutual, Inc. filed an answer and counterclaims to this adversary
proceeding asserting ownership of the disputed assets in the deposits
made to Washington Mutual Bank. Additional claims and counterclaims
were made during this period both in D.C. District Court and in the
Bankruptcy Court (District of Delaware). In the meantime, Washington
Mutual, Inc.; JPMC; and FDIC entered into discussions on a settlement
to resolve the distribution of assets.
In November 2009, the Congress passed the Worker Homeownership and
Business Assistance Act of 2009, which allowed companies like
Washington Mutual to use their losses in 2008 to offset income on
which taxes had been paid in the prior five years.[Footnote 139] As a
result, the bank was entitled to receive refunds from federal income
taxes paid in 2001-2008 of approximately $5 billion. There were
competing claims to these tax refunds; however, on March 12, 2010,
Washington Mutual, Inc., JPMC, and FDIC announced that they had
reached a settlement of all the issues regarding the disputed property
and related claims (known as the global settlement).[Footnote 140] The
plan set forth the allocation of the tax refund among all of the
parties: up to $2.2 billion to the holding company, up to $2.2 billion
to JPMC (new owner of the bank), up to $850 million to FDIC, and $335
million to the bank's bondholders.
Other Adversary Proceedings:
Two other groups filed adversary proceedings claiming that the
transfer of certain assets under the global settlement to JPMC free
and clear of all claims was improper. First, holders of trust
preferred securities, issued in private placements from a holding
company subsidiary called Washington Mutual Preferred Funding LLC
(WMPF) and based on portfolios of home mortgage loans, filed an
adversary proceeding against Washington Mutual, Inc. and JPMC on July
6, 2010.[Footnote 141] The bankruptcy court ruled against the trust
preferred securities holders.[Footnote 142] The second adversary
proceeding stems from holders of litigation tracking warrants--
securities that track and pay-off based on outcomes of litigation--
from the proceeds of an ongoing lawsuit of one of Washington Mutual,
Inc.'s former subsidiaries.[Footnote 143] The court denied the motion
for summary judgment for the litigation tracking warrants holders
because of disputed issues of material fact.
AI
