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Originally published Friday, October 3, 2008 at 12:00 AM

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WaMu bondholders tussle over assets in bankruptcy court

Lawyers for Washington Mutual Inc. and its bondholders stood before a Delaware bankruptcy court judge today to tussle over assets ...

The Associated Press; The Associated Press

WILMINGTON, Del. — Lawyers for Washington Mutual Inc. and its bondholders stood before a Delaware bankruptcy court judge today to tussle over assets — including $5 billion in cash — and set timelines for the organized demise of what was once the nation's largest savings and loan.

On the first day of hearings in the Chapter 11 bankruptcy filing of Seattle-based WaMu, bondholders who hold $800 million of senior notes expressed concern about control over the $5 billion and called for greater transparency.

"We have precious little in the way of facts," said Thomas Lauria, a lawyer for the 16 bondholders. "We are very concerned about the status of our debt holders and ... how fast things seem to be moving outside the court."

Lawyers also asked Judge Mary F. Walrath of the U.S. Bankruptcy Court in Wilmington for joint administration of cases, an extension of the date by which they must file a list of creditors, statement of financial affairs and other documents.

They sought approval for these and other actions that the bankruptcy filing said will let WaMu "operate in Chapter 11 with minimal disruption and loss of productivity."

The court's matter-of-fact tone stood in stark contrast to the dramatic and painful end of a 119-year-old financial institution that built its fortune on home loans and, ironically, went down in flames as a result of a bad bet on home mortgages.

The thrift, rising from the ashes of The Great Seattle Fire of 1889 to extend loans to homeowners for rebuilding, was sold last month in a $1.9 billion fire sale to JPMorgan Chase & Co. It is the largest ever failure of a U.S. bank.

Now holders of unsecured debt are fighting for JPMorgan's $1.9 billion payment and whatever is left of WaMu — other companies, real estate assets — that the investment bank didn't buy.

WaMu's end was dictated by a swift toppling of financial dominoes that involved credit ratings agencies, talk of instability, and quick action by federal regulators.

During the housing boom, WaMu ran into trouble after getting caught up in loans to people with bad credit, known as subprime borrowers. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer low introductory payments and let borrowers defer some interest payments until later years.

WaMu was initially strengthened by restructuring efforts and a $7.2 billion investment in April by investors led by TPG Capital. But its stability would soon be challenged, the bankruptcy filing said, by credit ratings downgrades with which WaMu took issue.

These actions and the market's growing unease "brought an intense amount of public focus on WaMu and its ability to withstand the latest economic crisis," court documents said. People panicked and withdrew "significant" amounts of money, and forecasts of instability "became a self-fulfilling prophecy," the company said in its filing.

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An outflow of deposits began on Sept. 15 and reached $16.7 billion, leaving the thrift without enough cash to meet obligations.

A seizure of WaMu also had been widely anticipated because of the company's heavy mortgage-related losses. It reported a $3 billion loss in the second quarter — the biggest in its history — after boosting reserves to more than $8 billion to cover losses on bad loans. Over the last three quarters, it added $10.9 billion to its loan loss provisions.

Meanwhile, the Federal Reserve turned off the primary credit spigot to WaMu after the thrift got a low rating on its overall condition from the Federal Deposit Insurance Corp. Primary credit from the Fed banks' lending facility is typically an overnight loan for sound financial institutions. It carries a lower interest rate than secondary credit.

At this time, the Office of Thrift Supervision and the FDIC strongly urged WaMu to seek a sale or merger deal with a stronger financial institution. Interested suitors were Citigroup, Wells Fargo & Co., Toronto-Dominion Bank, JPMorgan Chase and Banco Santander of Spain.

TPG and its investor group agreed to waive a provision that would require WaMu to pay or issue up to $1.5 billion in cash or common shares in the event of a big equity sale or major change in the thrift's ownership, such as a merger, at a price lower than $8.75 a share.

But WaMu said sale talks were unsuccessful and pursued alternatives including debt for equity swaps and divestitures designed to boost capital and liquidity levels. The thrift said that while it was going after these options, on Sept. 25 federal thrift regulators began bank receivership proceedings and WaMu's assets were sold to JPMorgan Chase on the same day.

The following day, WaMu filed for Chapter 11 reorganization. It listed assets of $32.9 billion and total debt of $8.2 billion on the holding company level.

Copyright © 2008 The Seattle Times Company

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