J.P. Morgan, WaMu, Regulators Settle Dispute
By DAN FITZPATRICK And ROBIN SIDEL
A lingering chapter of the 2008 financial crisis closed Friday when Washington Mutual Inc., J.P. Morgan Chase & Co. and federal regulators settled a dispute over billions of dollars in assets once belonging the failed Seattle-based thrift known as WaMu.
The September 2008 collapse of Washington Mutual was the largest bank failure in U.S. history. J.P. Morgan, which then paid $1.9 billion for Washington Mutual's branches and deposits, now has agreed to fork over $4 billion in disputed deposits to WaMu's bankrupt parent company, in exchange for more than $6 billion in other assets. The Federal Deposit Insurance Corp. will walk away with about $1.5 billion in federal tax refunds.
WaMu's bankrupt parent intends to use the $4 billion to repay creditors. WaMu bonds were broadly higher on the news, with most trading at about around 45 cents to 50 cents on the dollar.
The settlement, which still needs the approval of a bankruptcy judge, will end a year and a half of disputes among the three parties and could quiet arguments about whether the forced 2008 closure and sale had to happen the way they did.
Washington Mutual has agreed to drop a separate suit in U.S. District Court and not go after J.P. Morgan or the FDIC in any matter relating to the demise of WaMu, as the bank was known.
Debtholders, though, still have a case before a U.S. District Court judge alleging that J.P. Morgan engaged in a plan to pull down the value of the WaMu banking subsidiaries so it could pick them up at a bargain. An attorney for the debtholders said his clients have no plans to drop that case.
Washington Mutual was seized after customers pulled $16.7 billion, ending the life of an institution that began in 1889 and had become the nation's fifth-largest financial institution, thanks in part to a subprime-mortgage lending push. J.P. Morgan assumed the assets of the banking subsidiaries, and the parent sought bankruptcy protection.
The disagreement centered on what J.P. Morgan really bought when it assumed the assets.
J.P. Morgan tried to claim ownership of the disputed $4 billion in deposits by arguing they were a capital contribution to Washington Mutual's banking operations from its holding company, while WaMu said the $4 billion represented deposits made by the parent.
The settlement awards the $4 billion to WaMu, while J.P. Morgan gets about $4 billion in trust preferred securities and $2.1 billion in tax refunds. Among the other disputed assets awarded to the New York bank is a $20 million wind farm.
J.P. Morgan's relinquishment of $4 billion in deposits is expected to have little impact on the giant bank, which had $930 billion in deposits at the end of 2009. A bank spokesman said J.P. Morgan is "encouraged" by the new agreement.
WaMu attorney David Elsberg of Quinn Emanuel Urquhart Oliver & Hedges LLP said the settlement "provides substantial recoveries" for the creditors and "vindicates the position we took in court."
An attorney for WaMu's creditors couldn't be reached for comment.
The acquisition of WaMu was part of J.P. Morgan's strategy to become a national retail bank with a presence in markets coast to coast. The deal added some 2,200 branches to J.P. Morgan's Chase retail network of more than 3,000 branches.
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