Wednesday, March 25, 2009

the thrift was seized and it was sold at a "fire-sale price" or "blue-light special" without a good reason


"WaMu zombies arguments on the rise
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zombies125.pngAs Dealscape posted Monday, the holding company for Washington Mutual Inc. is suing the Federal Deposit Insurance Corp. for over $13 billion for the loss of its banking operations and a total of $40 billion in damages for allegedly denying claims against the firm's former banking unit.

The holding company claims federal regulators should have instead conducted a "straight liquidation" instead of seizing the bank and selling it to J.P. Morgan Chase & Co. (NYSE:JPM) for $1.9 billion. The belief is that it could have produced more money for creditors and the holding company, which filed for Chapter 11 bankruptcy after the thrift was seized and it was sold at a "fire-sale price" or "blue-light special" without a good reason. The question is: Was it? There seems to be some controversy over this.

Right before the holding company filed for bankruptcy, Washington Mutual was searching for a buyer or a stakeholder that might buy the company at a later date. The concern for buyers at the time was the $19 billion in mortgage losses the bank would accrue over the next 2-1/2 years, according to The Deal's Vipal Monga (see story in Pipeline), who wrote the story Sept. 23, 2008:

"A WaMu representative declined to comment, but a source close to the situation said that there has been no indication by the FDIC of its intentions. 'If they're running a parallel track, they're doing it without telling the bank,' the source said, noting that WaMu's managers do not feel they are operating under a government-imposed deadline to complete a deal. This source added that an auction for the company has been ongoing for five days, and bids have been coming in from multiple parties. The government, the source added, has been watching closely.

"According to one banking source not involved in the sale process, any buyer would face immediate mark-to-market pressures from WaMu's mortgage portfolio. Noting that purchase accounting rules would force a buyer to immediately mark the portfolio to market prices, the banker said that the hole in WaMu's balance sheet upon purchase could be as high as $52 billion. On the other hand, if the bank was not sold, but recapitalized, the hole would be anywhere from $12 billion to $19 billion.
"It is unclear if the FDIC would retain the toxic securities in any bid to sell the bank itself."

The Federal Office of Thrift Supervision seized Washington Mutual Bank on Sept. 25 when no buyer emerged and turned it over to the FDIC, which sold the company's assets and most of its liabilities to J.P. Morgan.

As one blogger for The Seattle Times states:

"We'll never know what might have been, say, if WaMu would have been politically connected enough to get Washington to bail out its 'toxic assets' while saving the retail banking operation that would have remained a Seattle economic pillar. WaMu's troubles will likely turn out to be small compared to the balance sheet of Bank of America, among others. Instead, WaMu was pretty much given away to the very connected JPMorgan Chase, which became even more 'too big to fail.' "
The point is taken, but WaMu did fail, and here is why, via the International Herald Tribune:

"At WaMu, getting the job done meant lending money to nearly anyone who asked for it - the force behind the bank's meteoric rise and its precipitous collapse this year in the biggest bank failure in American history. By the first half of this year, the value of its bad loans had reached $11.5 billion, having nearly tripled from $4.2 billion a year earlier.

Between 2001 and 2007, Killinger received compensation of $88 million, according to the Corporate Library, a research firm. During Killinger's tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers' incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients."

Meanwhile, federal agents and prosecutors are interviewing former Washington Mutual officials and going through documents to see whether fraud played a role in the largest bank failure in U.S. history. After all, it's hard to imagine one of the U.S.'s largest bank just went up in smoke over night, according to The Seattle Times.

"The lawsuit runs to nearly 500 pages and quotes more than 90 unnamed "confidential witnesses' -- including some identified as mid- and upper-level WaMu managers -- who allege Washington Mutual lacked risk management, demanded that appraisers inflate home values to justify larger loans, and used "dangerously lax" underwriting standards."

So should the holding company for WaMu be suing for more cash or should they have had their executives practicing better risk management skills? As The Big Picture states: "At what point do you just liquidate every last one of these sons of bitches -- and throw their management in jail?"

Despite a possibly flawed business model that offered up loose credit, a group with over 400 members called the The Washington Mutual Equity Group still blames the FDIC. Here are some of the issues being considered that Washington Mutual will likely cover if the lawsuit gets a jury, according to The WaMu Story:

  • Naked short-selling of Washington Mutual continued to damage it severely, and although it is illegal, the SEC did nothing to stop it. WaMu was not put on the list of banks that were not to be shorted. WaMu CEO Killinger specifically asked for WaMu to be added to the list but was refused.
  • Were all banks given the same information at the same time? By some reports J.P. Morgan knew of the auction three weeks prior. Did other banks have that same advantage?
  • J.P. Morgan was notified on Sept. 19 that it would get the bank. That was days before the auction officially began. Of note, J.P. Morgan raised approximately $11 billion for the purchase, yet they managed to buy the bank for a mere $1.9 billion.
  • The fair value of the net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with SFAS 141, nonfinancial assets that are not held for sale were written down against that negative goodwill.
  • The FDIC auction "offer" essentially says that the bidders can have the bank for nothing as long as they pay the administrative costs of the transaction (which are left blank). It also says they can have any assets, whether they are on the banks books or not (this info is on page one).

There are several other "conspiracy laden" bullet points that are on The WaMu Story Web site. In addition to the $8.2 billion in debt that Washington Mutual had when it was seized, the IRS claims the company owes another $12.5 billion in back taxes that is being disputed.

Were Washington Mutual's retail branches sold at a "fire sale"? We'll let the court decide. - Maria Woehr

Also see:
FDIC attacked by zombie WaMu"

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