By Tom Hals
WILMINGTON, Delaware (Reuters) - Washington Mutual Inc
Washington Mutual collapsed into bankruptcy in September 2008, the day after regulators seized its lending business known as WaMu in the biggest bank failure in U.S. history. WaMu was sold to JPMorgan Chase & Co
Wednesday's hearings focused on a securities dispute that could be the biggest threat to Washington Mutual's reorganization plan.
The hedge funds are seeking a summary judgment finding that billions of dollars of securities they own were never swapped into nearly worthless preferred stock during the chaotic hours as the bank was being seized and lawyers were rushing to prepare bankruptcy documents.
Judge Mary Walrath of U.S. Bankruptcy Court in Delaware said she would take the issue under advisement.
An attorney for the hedge funds, Robert Stark, said he expected Walrath would rule on the matter in her opinion on the reorganization plan. Hearings are scheduled through Friday.
If the judge decides the securities were not swapped, it could present a potentially huge liability for JPMorgan, which bought the bank that issued the securities.
Stark argued the preferred stock was never issued, so there was nothing to exchange the securities into.
"It's like turning horses to unicorns," said Stark, of the Brown Rudnick law firm.
The judge interrupted his presentation with sharp questions disputing Stark's reading of the documents, at one point saying his argument "makes no sense."
A JPMorgan attorney noted that the hedge funds, including those associated with Black Horse Capital, Greywolf Capital Partners, Guggenheim Partners and Lonestar Partners, bought the securities after the bankruptcy for an average price of 4 cents on the dollar.
"Their adversary complaint is a desperate attempt to create hold-up value in the hope that the legitimate creditors of WMI or JPMC (Washington Mutual or JPMorgan) will offer them a ransom payment," Washington Mutual said in court papers.
POWER OF YES
Washington Mutual has managed to settle most disputes before coming to court with its reorganization plan, due in part to about $2.8 billion in tax refunds stemming from a government stimulus package.
The reorganization plan divides about $7 billion among creditors by essentially liquidating the company's cash and other holdings. The company may reorganize around a small mortgage reinsurer, about its only remaining operation, as a way to preserve some valuable tax credits stemming from billions of dollars of net operating losses.
It is a humbling end to a once blazing star of the financial world.
Founded in Seattle in 1889, Washington Mutual was once the largest U.S. savings and loan. It had more than 2,500 branches, $300 billion in assets and $188 billion in deposits when it was seized.
Former Chief Executive Officer Kerry Killinger, who stepped down weeks before the bank's collapse, led the company through a string of acquisitions and pushed to expand riskier lending, including what came to be known as subprime mortgages.
The housing crash turned the one-time stock market darling known for its "power of yes" tag line into a favorite of short-sellers. In the bank's final two weeks in 2008, depositors withdrew $16 billion.
The reorganization plan offers nothing to shareholders, who have brought most of the hundreds of objections to it. They have been a constant presence at court hearings.
In their eyes, regulators jumped the gun in seizing the bank, and shareholders' court filings have suggested JPMorgan and regulators colluded to sell the bank at a fire sale price.