Mr Cooper Group Inc (COOP)

[wangwang]

The FDIC/OTS seized Washington Mutual, Inc.'s (WMI) banking subsidiaries and awarded them to JPM for $1.9 billion. The $1.9 billion is being held by the FDIC first for distribution to the creditors of the seized subsidiaries, then any residual to WMI.

The seized assets included 2,200 branches, $265 billion in deposits, and two credit card companies.

The next day WMI filed for protection under Chapter 11 of the Bankruptcy Code.

Section 548(a)(1)(B) of the Bankruptcy Code (see http://www4.law.cornell.edu/uscode/uscod... allows a debtor to recover assets that have been 'fraudulently' conveyed. All that is required is a showing that WMI's property was seized (1) within one year of its bankruptcy filing, (2) while WMI was insolvent or undercapitalized or was made insolvent or undercapitalized by the seizure, and (3) that WMI did not receive reasonably equivalent value for the seized property. (FYI, a debtor is presumed to be insolvent for the period immediately before its bankruptcy filing.)

WMI has $4.4 billion on deposit with JPM that was on deposit with its former subsidiary, Washington Mutual Bank, and there has been much speculation that WMI is allowing JPM to keep the money because the parties are discussing a buyout/settlement of litigation claims.

There have been numerous delays on the hearing for release of this money (four, so far), and my experience as a former bankruptcy attorney tells me that if JPM doesn't make an acceptable offer by the next scheduled hearing date, 1/29/09 (see http://www.kccllc.net/documents/0812229/... WMI will institute a fraudulent conveyance adversary proceeding. Such an action won't take long to litigate as it will be a battle of pleadings supplemented by financial analyses. Neither the FDIC nor JPM has a chance of winning.

WMI's equity in the seized assets has been assessed at $26 billion. This is BOOK value and the market value would likely be around $200 billion (if you estimate it takes about $10MM per branch x 2,200 branches, plus the credit card companies). The bankruptcy court will award WMI the market value as that is the truest assessment of the seized assets.

Subtracting the seized subsidiaries' debts of $30 billion plus the value of toxic mortgage debt would leave the FDIC and JPM on the hook for about $170 billion. The losing parties would appeal but are unlikely to find relief through higher courts.

I said earlier this week on WMI's board that JPM's long time bankruptcy counsel was Davis Polk, and that its department head, Don Bernstein, is an excellent bankruptcy attorney. Accordingly, all of the foregoing has been communicated to JPM's general counsel (Stephen M. Cutler) and to Dimon. In the long run Dimon won't be able to out run this train and will have to settle with WMI or be on the hook for hundreds of billions in liability which would bankrupt JPM.