Washington Mutual Bank senior bondholders oppose global settlement

By Caroline Salls

Pittsburgh, May 24 - Washington Mutual Bank's senior bondholders said they do not support the proposed settlement between Washington Mutual, Inc., the Federal Deposit Insurance Corp. and JPMorgan Chase, according to a news release.

"This proposed settlement by the FDIC would represent an enormous loss to the WMB estate," William Isaacson of bondholder counsel Boies, Schiller & Flexner said in the release.

"The FDIC is signing off on a several billion dollars windfall to WMI and JPMC, including by affording them WMB-driven tax refunds made permissible by the 2009 stimulus legislation and giving effect to questionable reallocations by WMI of intercompany loans during the week prior to WMB's failure.

"Moreover, the proposed settlement would provide for vastly inferior treatment of the claims against WMI asserted by bank bondholders compared to the treatment afforded to the claims of the WMI noteholders, without any adjudication of the respective claims.

"The dramatically superior recovery of bondholders at the parent company level - under the proposed settlement, virtually all of the WMI noteholders including subordinated holders, will be paid in full, whereas senior WMB noteholders will not receive anything close to payment in full - will deliver the negative message to the marketplace to beware of investment in bank bonds because the FDIC will not protect bank creditors.

"This raises serious questions about the FDIC's ability to handle the collapse of large institutions and manage apparent conflicts of interest which pervade their statutory authority."

Settlement comparison

Comparing the settlement to a similar proposal made by Washington Mutual in March, the bank bondholders said this most recent settlement "reveals that this same central flaw continues to infect this new proposed plan." The bondholders said the FDIC rejected the March settlement proposal.

The bank bondholders said the major change to the new settlement is that JPMorgan is allocated $300 million of additional value primarily from a first tax refund.

In addition, the bondholders said the FDIC has allowed JPMorgan to reserve its rights to seek further consideration related to those same liabilities that were the subject of controversy in the March proposal.

"Indeed, the FDIC has agreed in the new plan to provide several hundreds of millions less to the WMB receivership estate than the previous plan rejected by the FDIC," the bank bondholders said in the release.

"WMI's share of the second tax refund (attributable to the 2009 stimulus package) is increased by nearly $700 million, thereby improving the recoveries of WMI noteholders by nearly $400 million.

"The FDIC agreed to this dramatic increase even though the FDIC had previously acknowledged in court that WMI had no claim at all to the WMB tax refunds.

"Contrary to the FDIC's statutory responsibility to the WMB receivership, it has given up substantial value for no consideration."

Washington Mutual, a Seattle-based savings and loan holding company, filed for Chapter 11 bankruptcy on Sept. 26, 2008 in the U.S. Bankruptcy Court for the District of Delaware. Its Chapter 11 case number is 08-12229.

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