Washington Mutual’s Bankruptcy Exit Plan Benefits Creditors, Upsets Shareholders

Reuters, from Wilmington, Delaware, has reported that Washington Mutual Inc, WAMUQ.PK, has asked a court to approve their $10 billion deal to end its bankruptcy, yet at the same time, also seeks to prevent shareholders from gaining any privileged information.

The basis of Washington Mutual's exit plan allows for their reorganization and $7 billion to be repaid to creditors.  The plan leaves their stock investors with nothing.

The federal government seized Washington Mutual's banking business in September 2008 and the bank filed for bankruptcy the next day.  JPMorgan Chase and Company, JPM.N, purchased the bank from the Federal Deposit Insurance Corporation for $1.88 billion almost immediately afterwards.

Delaware Bankruptcy Court Judge Mary Walrath has been hearing arguments from Washington Mutual and plans on listening to comments from individual shareholders next.

The billion dollar deal, between Washington Mutual, JPMorgan and the FDIC, contended to be worth millions by shareholders, divides the disputed cash, tax credits, settles legal issues and lawsuits.

A report from a court-appointed examiner was excluded from evidence, allowing shareholders a small victory, and forced Washington Mutual to have its advisors testify that they did the necessary analysis to give their endorsement on the deal.

As Washington Mutual refused to share its privileged client-attorney information, the testimony was limited to discussing what the advisors could determine on their own - without any advice from lawyers.

Jonathan Goulding, Washington Mutual's treasurer said, "You didn't need to be a lawyer to determine they are fair and reasonable.  A person who is competent with financial matters and the like could come to that conclusion."

Goulding further stated that Washington Mutual has already spent $150 million on lawyers, accountants and advisors for the bankruptcy proceedings.   Further litigation could cost Washington Mutual $30 million in interest alone for every additional month added and an additional $8 million more in professional fees.

Shareholders, some coming so far as Boston, have loudly complained outside of the courtroom about what they are seeing as fraud - an allegation that might have led to the seizure of the bank to begin with - that the closed hearings have not yet exposed.

Dave Magnuson, a Wilmington-based financial analyst who left work to get to the hearings said, "What is relevant, however, is whether there are individuals who will profit from wielding their power to influence the outcome in their favor by corrupting the process."

Washington Mutual was founded in 1889 and is considered one of the largest savings and loan institutions in the U.S.  When it was seized by the government it had more than 2,000 branches, $300 billion in assets and $188 billion in deposits.

Washington Mutual began aggressive expansion - as their investments increased and decreased along with the housing market - and leant to more risky borrowers for subprime mortgages.

The Washington Mutual case is in U.S. Bankruptcy Court, District of Delaware, Number 08-12229.

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