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Originally published Friday, March 12, 2010 at 10:00 AM

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WaMu gets $6 billion in dispute with JPMorgan, FDIC

Washington Mutual Inc. will get more than $6 billion from a global settlement with JPMorgan Chase and the Federal Deposit Insurance Corp. outlined in bankruptcy court Friday.

A many-tiered mess

One estimate of who will recover what in WaMu bankruptcy:

WASHINGTON MUTUAL INC. SECURITIES

Senior noteholders: 100 percent of $4.1 billion in face value plus accrued interest.

Subordinated noteholders: 100 percent of $1.6 billion in face value plus accrued interest.

Trust preferred securities: At least about 80 percent of $756 million in face value.

Preferred stock*: Recovery of $7.4 billion in face value may range from zero to 20 percent.

Common stockholders: Zero recovery on 1.7 billion shares worth $3.8 billion on Sept. 24, 2008, the day before WaMu failed.

WASHINGTON MUTUAL BANK SECURITIES **

Senior bondholders: Being offered between 34-57 cents on the dollar for $6.1 billion in face value, hinging on a deal with JP Morgan to end further litigation.

Subordinated notes: Zero recovery of $6.5 billion in face value.

* Uncertainty remains whether $4 billion of these securities will be treated as obligations of WaMu or Washington Mutual Bank.

** WaMu Bank claims are being handled in an FDIC receivership parallel to the WaMu bankruptcy.

Source: Kevin Starke, analyst at CRT Capital Group, Stamford, Conn.

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Washington Mutual Inc. will get more than $6 billion in a proposed settlement with JPMorgan Chase and the Federal Deposit Insurance Corp., ending some but not all of the legal battles surrounding the largest bank failure in U.S. history.

The money could allow WaMu's creditors to recover much of their billions in claims. But none is likely to trickle down to owners of Washington Mutual's common stock — including thousands of former employees at the Seattle-based company — who are lowest in the pecking order of bankruptcy claims.

"The common stock stands to get nothing," said Kevin Starke, an analyst at CRT Capital Group in Stamford, Conn.

The agreement, outlined Friday in bankruptcy court in Delaware, returns to Washington Mutual nearly $4 billion in cash it had on deposit at WaMu's banking units when they were seized by federal regulators and turned over to JPMorgan in September 2008.

WaMu also will keep about a third of $5.6 billion in expected tax refunds; the rest will be split between JPMorgan Chase and the FDIC. Other disputed assets worth about $284 million will wind up on WaMu's side of the table if the settlement is approved.

WaMu attorney Brian Rosen told U.S. Bankruptcy Judge Mary Walrath on Friday that one set of bondholders, those owed money by WaMu's failed Washington Mutual Bank, haven't agreed to support the deal. Without their consent, the deal could turn to "vapor," Rosen said outside court.

The judge must approve the settlement, which Rosen said will be filed by March 26 with the court as part of the company's liquidation plan. The company also plans to settle three lawsuits that pitted it against the FDIC and New York-based JPMorgan.

A separate shareholder lawsuit against JPMorgan and the FDIC isn't included in the settlement, Rosen said.

Washington Mutual said in a statement, it is "confident that this agreement will provide substantial recoveries for the company's creditors and that it is consistent with WMI's efforts over the last 18 months to maximize the value of its bankruptcy estate."

Attorneys for Washington Mutual and the official committee of stockholders in the bankruptcy process did not return calls seeking comment.

Starke, who closely tracked the case's impact on WaMu debt securities, said the top tiers of WaMu bondholders "are completely made whole" if the settlement becomes final.

About $6.2 billion would go to paying them the face value of their bonds, plus accrued interest. The next layer of debt issued by the WaMu holding company would recover less.

Prospects for owners of WaMu's $7.5 billion in preferred stock are "very unclear." Their recovery "may range from zero to 15-20 cents on the dollar," said Starke, whose firm is a market maker in WaMu securities.

While the payout prospects for creditors are looking better than he expected, said Starke, "I never thought there would be a recovery for the common (stock)."

Others clearly expected some payout for WaMu common shares, which climbed as high as 69 cents in over-the-counter market trading in recent weeks.

Within a half-hour of the settlement announcement, the stock lost three-quarters of its value, dropping 27 cents to 10 cents. It rebounded to close Friday's trading session at 19.5 cents, down 17.5 cents.

When the settlement plan is filed later this month, said Starke, "expect strenuous objections from the people who were not at the table," meaning owners of WaMu common stock and Washington Mutual Bank debt.

A hearing on the liquidation plan could be filed three or four weeks later. Then a vote by all the classes of creditors would set the stage for a confirmation hearing, perhaps in June, where the fairness of the plan could be challenged before the judge. If no obstacles arise, said Starke, WaMu's remaining assets could be distributed by sometime in July.

Bloomberg News contributed to this report. Deputy business editor Rami Grunbaum contributed to this report.

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