I will have to apologize in advance for how long winded this response became. Most people who know me will tell you not to ask what time it is because I will only tell you how to make a watch! I promise I will reference DIMEQ at some point in an attempt to make it relevant to this particular board. I held WAMKQ and WAMPQ from October 2008 until the end of December 2009 when I sold and took the LT capital gains at the lower rate. I bought back a boatload of each on March 12, 2010 during the 90% down day and exited again very soon after. It was not until today that I reentered a position in WAMPQ. I didn’t do so with the idea in mind that I would ever see a recovery in full or maybe even at all. I bought today because of the optionality and time value created in the event that the TPS proceeding yields a result that blows up the global settlement or renders the current plan unconfirmable. What once was a lottery ticket turned long-term investment to me has been rendered nothing more than a trading opportunity because of how the case has unfolded.
I have followed this whole WAMU situation privately since late 2008. It was not until April/May 2010 that I began going public with my DIMEQ summaries. I have read and followed all of the institutional reports (eg. CRT Capital, et al.) I could get my hands on. I have followed the docket, read the examiners report, spoken to legal counsel conversant on the matter , spoken to hedge funds who are/were invested at all levels of the cap structure and even some who were not invested and thus independent. I say all of this to point out that I am fairly conversant on most of the important matters but even with all of that history I have no idea what is going to happen to the Preferreds or DIMEQ for that matter and as each passing event unfolds I struggle like everyone else to try to make the pieces fit so that I can divine who benefits and who loses. It’s a zero sum game afterall.
I have kept quiet on the WAMU front for the past 2 years because there are too many moving parts to even make it worth my while to pontificate on any of it. The shape of the case changes with each passing season. I look back to some of my historical waterfall models and I have to laugh at how drastically they have changed over time at the fulcrum levels and even more so for the “out of the money” constituencies. I have models from early in 2010 that have called for anywhere from 0%-4% recovery for preferreds all the way up to the 40% to 50% levels based on varying outcomes. At this point, I don’t see recovery at the preferred level anymore because of how the tax refunds and the $4billion in TRUPS shook out. The models I had that called for 40% to 50% in a best case scenario for preferreds were contingent upon getting more refunds and also contingent upon the $4 billion in Trups remaining at the holdco level and being available for distribution to the $7.5 billion preferred claims pool (WAMPQ, WAMKQ & Caymans). Bear in mind that the $20 to $30 million per month toll charge for pendency interest and attorneys fees has significantly eroded my previous estimates as well. I can’t argue with the current estimations of 0% to 1% recovery for preferreds. Not saying I like it or that its right, but it’s the reality of the current landscape.
The scenarios I had envisioned (and that the market once envisioned) for a meaningful and significant preferred recovery seem like a distant memory. It is my belief that if the TPS litigation gains traction in the coming days it opens up the door for settlements in their favor, but for them only. The current settlement parties do not want recovery to flow thru to the lower levels of the capital structure because it opens up Pandora’s box with the split allegiances it would create at the equity level. I wanted a separate committee of preferred security holders and I thought it was most appropriate to have that segregation because the common shareholder recovery was always contingent on a litigation path as opposed to the settlement path and a preferred recovery was once attainable under the global settlement but the separate committee didn’t happen and it probably cost the preferreds in terms of the “nuisance” value (at the very least) that such a committee might have created. Being tied to the common shareholders was like having the proverbial “albatross” around the neck. WMI/JPM/FDIC can’t let any holdco equity securities end up “in the money” at confirmation. It is a common bankruptcy tactic to structure things this way because if you put a class in the money, you give them a stronger voice unless they are unimpaired.
It will only be thru excess reserves for contingent claims that the preferreds might possibly end up with anything under the current structure. Also, in order for value to remain it supposes that the Debtor will vigorously oppose the contingent claims on a post confirmation basis. Anyone willing to hold their breath on that one? Just look at the Global Settlement structure, it was cleverly designed so that the fulcrum securities at confirmation would still reside at the junior creditor level. It did not end up there by happenstance. Now, if you blow the current structure up I guess all bets are off but ultimate recovery would possibly be years down the road after contentious litigation and counter claims and the $20 to $30 million per month toll charge would continue to erode recovery with each passing month. The parties who currently have a significant voice are content to take their recovery now as opposed to deferring their payment so that out of the money constituencies can chase what they deem to be speculative recovery prospects under alternative litigation strategies.
This is the DIMEQ board so I will have to steer this conversation back to being relevant on that front. Most of the relevant information in the whole WAMU saga is just flat out unknowable unless you are an insider and even the insiders (WMI, JPM, FDIC, Attorneys, Committee members, Examiner, Trustees, etc.) can’t agree on what is legal, moral, right and just. Bear in mind that this creates scenarios where one party that may be your ally today could very well be your adversary next week. Case in point, DIMEQ holders. If DIMEQ ends up as a GUC class 12 claimant, our financial allegiance will shift from being a Plan opponent to a Plan proponent because it would then be in our best interest for the current settlement and Plan to move forward with great haste even when we know that many injustices are spawned from the plan and settlement. The preferred holders would be in this same dilemma if somehow a future settlement were to call for say a 20% recovery. The preferreds, as a class, would likely cease to care about what happens to commons under such a settlement. This is what is going on at all levels right now. It is very much a “Hey, I got mine, lets move this thing forward” mentality. And every time someone new gets something more it fosters hope for them and renewed angst and litigious tendencies for those just beneath them in the waterfall. This is something that the “in crowd” can ill afford to allow to continue.
End of diatribe.
