Kristen Grind
Friday, March 12, 2010, 2:46pm PST
WaMu bankruptcy deal may leave shareholders with nothing
Puget Sound Business Journal (Seattle) - by Kirsten Grind
A monumental deal struck Friday in the bankruptcy of Washington Mutual’s holding company is likely to leave the failed bank’s common shareholders with nothing and could spark a further legal battle in the months-long, complicated bankruptcy case.
The $6 billion court settlement that Washington Mutual Inc. (WMI) stands to receive is likely to cover only a fraction of the claims against the estate, according to analysts and bankruptcy experts.
Claims from bondholders and preferred shareholders alone total more than $11 billion and rank higher than those of common shareholders, who are at the bottom of the list of creditors to be paid, according to experts.
As a result, it’s likely that the equity committee representing shareholders in the bankruptcy case will object to the settlement, said Mark Northrup, a bankruptcy attorney at Graham & Dunn PC in Seattle. That could further delay any workout agreement.
WaMu’s closure by the federal government in September 2008 wiped out an estimated $7 billion in shareholder wealth.
The newly formed equity committee representing shareholders was left out of the settlement between the holding company, JPMorgan Chase & Co. (NYSE: JPM) and the Federal Deposit Insurance Corp. (FDIC), according to testimony Friday morning in U.S. Bankruptcy Court in Delaware. An attorney for the equity committee did not immediately return a call for comment.
“It’s unlikely (shareholders) will receive anything, which may have been why they were never part of the negotiating,” Northrup said.
The settlement, which could spell the end of the 18-month-long bankruptcy, faces several more hurdles before it’s approved. The boards of all three parties — WMI, JPMorgan and the FDIC — as well as the bankruptcy court judge must sign off on the deal, according to experts.
Representatives from JPMorgan and WMI declined comment Friday.
An FDIC spokesman said, “We are pleased that a tentative settlement has been reached in a very complicated bankruptcy.”
While some industry watchers applauded the deal as the end of the complicated bankruptcy, WaMu shareholders reacted with anger and frustration Friday. The stock closed at 19 cents, down 47 percent from the previous day.
“It was a panic,” said Josh Thomas, a shareholder from Kansas. “No one understands what’s going on. It’s weird we have an equity committee that wasn’t aware of settlement talks.”
As part of the settlement, WMI has agreed to drop a federal lawsuit against the FDIC and JPMorgan, according to court testimony. JPMorgan has also agreed to take over the administration of WaMu’s pension plan.