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Sunday, March 28, 2010 6:24:57 PM
(Thanks to christyb14 from Y)
http://online.wsj.com/article/SB10001424052702304434404575150150787973606.html?mod=WSJ_hpp_LEFTWhatsNewsCollection
By DAN FITZPATRICK
The Federal Deposit Insurance Corp. backed away from its support for a $1.4 billion tax break benefiting J.P. Morgan Chase & Co., setting up a battle between the regulator and the nation's second-largest bank.
The tax benefit stems from J.P. Morgan's acquisition of Washington Mutual and is part of the bankruptcy proceedings of the failed Seattle thrift's parent company. Washington Mutual is eligible for $2.7 billion to $2.8 billion in refunds based on a 2009 economic stimulus bill that allowed companies to apply losses from 2008 and 2009 against taxes paid in the previous five years.
The FDIC became concerned about the potential refund and other issues last week following a story in The Wall Street Journal and a meeting with Washington Mutual bondholders who oppose the deal, said people close to the talks. The 2009 stimulus bill specifically excludes any companies that received bank-bailout funds from getting the tax refunds; New York-based J.P. Morgan received $25 billion in 2008.
Under the bankruptcy plan filed Friday by Washington Mutual's holding company, J.P. Morgan was in position to claim as much as $1.4 billion from an FDIC receivership, with the holding company's creditors getting most of the remainder of the $2.7 billion to $2.8 billion refund. Notably absent in the bankruptcy filing was the support of the FDIC. Washington Mutual's holding company admitted in a statement that "the FDIC has not agreed to all of the provisions" but said "discussions are ongoing."
An FDIC spokesman said Sunday the documents filed Friday night with a U.S. Bankruptcy Court "do not reflect the continuing discussions among the parties."
The FDIC's opposition, these people said, is a reversal from its earlier position. On March 12, FDIC lawyers didn't object when a Washington Mutual lawyer briefed a U.S. Bankruptcy Court judge about a tentative "three-way understanding" between the holding company, J.P. Morgan and the FDIC. The tentative deal included the total of $2.6 billion in tax refunds tied to the stimulus bill.
Holders of Washington Mutual Bank bonds have been arguing J.P. Morgan should be denied any refunds because of the government aid it received. Renee Dailey, a lawyer for one group of bank bondholders, said the FDIC's refusal to sign off on the reorganization plan filed Friday "is a chance for the FDIC board to actually look at the terms of the proposed settlement and decide it's not in the best interests of the receivership and not an appropriate exercise of their fiduciary duties." She said it is unlikely the bankruptcy judge will sign off on a plan without FDIC approval.
J.P. Morgan has said to other parties in this case that the bailout ban wouldn't apply because Washington Mutual, and not J.P. Morgan, was the taxpayer. The bank has also noted the refund wouldn't go to the bank directly, instead sitting in a pot at the FDIC that also houses the $1.9 billion J.P. Morgan paid for Washington Mutual's banking assets and deposits.
A J.P. Morgan spokesman said Sunday, "We continue to be engaged in constructive discussions with the relevant parties."
Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com
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