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Originally published Saturday, July 9, 2011 at 9:32 PM

Sunday Buzz

WaMu settlement estimates how stock was inflated; local buyers get first crack at state bonds

Thanks to the proposed settlement of the class-action lawsuit against Washington Mutual's former leaders, there is one estimate of how much WaMu shareholders who bought in during the mortgage madness suffered.

By Seattle Times business staff

quotes "Interest rates will be set by the market sale," does that mean that we... Read more

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Lawsuits, it's been said, are the way we quantify our pain. And thanks to the proposed settlement of the class-action lawsuit against Washington Mutual's former leaders, there is one estimate of how much WaMu shareholders who bought in during the mortgage madness suffered.

The settlement, filed June 30, calls for $208.5 million to be paid by WaMu's former top executives and directors (or rather, by their insurance), a group of securities firms and accounting firm Deloitte & Touche.

The pension funds and other investors who sued argued, in essence, that between October 2005 and July 2008, WaMu failed to tell shareholders and potential investors that the thrift was handing out mortgages to pretty much anyone who walked in.

As a result, they claimed, investors paid more for WaMu's stock and bonds than they would have if they'd known the thrift's lending standards had been so drastically relaxed.

But just how artificially inflated was WaMu's stock? An unidentified "damages expert" was hired by the plaintiffs to estimate just that.

Over the two years from October 2005 to October 2007 — when the wheels began to come off WaMu's magic mortgage machine — its stock price averaged about $42.44. Of that price, the expert estimated, $5.80 or roughly 14 percent was overvalued because of WaMu's omissions.

As WaMu shares tumbled into penny-stock territory over the next year, the excess value embedded in them shrank — from $4.87 in late October (when the stock traded in the high $20s), to $2.38 in mid-December (around $15), to 97 cents in spring 2008, when the shares fell below $10.

After July 23, 2008, when WaMu was clearly struggling to survive, the estimated inflation of its share price was zero, meaning they were fairly valued, the expert said. On that day, they closed at $4.65 — an 86 percent decline in just over nine months.

Why is all this more than financial scab-picking?

The settlement's $208.7 million total was negotiated between the two sides. The inflation estimates will factor into how that money will be parceled out among eligible shareholders, assuming the deal is approved by U.S. District Court Judge Marsha Pechman.

It's worth noting that the WaMu defendants likely had nothing to do with preparing the share-price inflation estimates, or for that matter anything else related to the proposed allocation.

Ira Press, a partner with Kirby McInerney in New York who has 18 years' experience in securities law, said that while each case is different, typically defendants in securities class-action cases concentrate on negotiating the overall settlement amount.

"The defendants often aren't going to work with plaintiffs' counsel in coming up with any inflation chart," Press said. If the case had gone to trial, the defendants would have had their own experts to argue that the share price wasn't inflated.

"It's up to plaintiffs' counsel to propose to the court a means of allocating the settlement amount that is fair and reasonable," he said.

WaMu investors may end up getting more than the pennies per share outlined in the settlement.

Common shareholders, for instance, are estimated to receive 7 cents per share — more like a nickel per share after deducting legal fees and expenses.

In cases such as this, Press noted, not all investors in the settlement class will actually file claims — he said the "participation rate" usually comes in between 30 and 70 percent — and not all claims will be ruled valid.

"Nobody knows at this point what percentage of class members ultimately will submit claims," he said. "But if you put in a claim and it's approved, you're probably going to get significantly more than that initial estimate."

— Drew DeSilver, ddesilver@seattletimes.com

Local buyers get

first crack at bonds

For the first time in a decade, Washington state plans to give residents the first shot at buying state bonds, a nod to those who want the interest to be invested here.

State Treasurer James McIntire launched the Buy Washington Bonds program, saying retail investors in Washington can buy bonds Friday and the following Monday, July 15 and 18. On July 20, the bonds will be sold competitively to institutional investors.

If locals buy the bonds, "the interest stays here at home," said Chris McGann, a spokesman for the treasurer. "You don't have to be an investment bank to get a piece of Washington."

Retail investors can buy a slice of a $323 million offering that will help pay for highway improvements to Interstates 5, 405 and 90, among other projects. The bonds are to be paid off from the motor-vehicle fuel tax.

The bonds will be in denominations of $5,000 and bear interest from the date of delivery, which is expected to be Aug. 3. They'll pay a fixed interest rate every Feb. 1 and Aug. 1, starting next year. The interest is exempt from federal income tax.

McIntire's office said the bonds received a AA+ rating from Fitch and Standard & Poor's and a Aa1 from Moody's.

Interest rates will be set by the market sale, McGann said. Buyers must have an account with a participating brokerage firm. McIntire's office plans to publish Monday a list of firms participating in the program.

More information is available on the state Treasurer's website, http://www.tre.wa.gov/

— Sanjay Bhatt, sbhatt@seattletimes.com

Comments? Send them

to Rami Grunbaum:

rgrunbaum@seattletimes.com

or 206-464-8541.

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