Bankruptcy and Disclosure

The bankruptcy case concerning WMI, the former holding company of WaMu, continues its slow-paced way through the pertinent court in Delaware, under the guidance of Judge Mary Walrath.

On August 30, the consortium of trust preferred security holders (the TPS consortium) filed a motion that the debtors be deemed to have made certain admissions.

The WMI litigation was at one time chiefly a dispute between the debtor estate itself, on the one hand, and JPMorgan on the other., Back in the chaotic autumn of 2008, the FDIC seized WaMu, ran a quick min-auction, and sold it to JPMorgan. Everything was done so quickly that there was no real sorting out of the assets -- what belonged to the holding company, which thereafter declared bankruptcy, and what belonged to the operating company, which was now part of JPM.

So those two sides fought out the allocation of assets in bankruptcy court. They have more recently kissed and made up. Their making up is known as the "global settlement." But ... not so fast! says the TPS Consortium. "We're not sure we want you guys to make up."

Go here and then go to page 12 of that PDF. That was a letter written July of this year.

In the money quote, TPS says that in the pre-settlement litigation, "Debtors made numerous claims of value purportedly owned by, or owed to, the Debtors, which claims, if successful, could have resulted in significant distribution to creditors in these cases, including members of Class 19. But, prior to entering into the 'global settlement' to compromise substantially all of those claims (including claims as to the ownership of the Trust Preferred Securities), the Debtors had conducted, in the view of the TPS Consortium, minimal (and in some cases, perhaps, no) discovery or analysis of such claims. Moreover, it appears the Debtors’ attorneys responsible for negotiating the 'global settlement' had potentially disabling conflicts of interest with certain parties who, under the settlement, would receive significant additional benefits, including, without limitation, JPMC."

Bottom line? TPS wants to derail the settlement.

Enough background. Now we're back up to this week. On Monday, TPS filed its "motion to deem all requests admitted." Why should the court "deem" this? Because the debtors have been evading requests for admissions where TPS is, according to its attorneys, entitled to a yes or no answer.

"Debtors’ response is wholly inadequate because it is riddled with boilerplate
objections that cannot be sustained. In particular, Debtors make fourteen general objections (the “General Objections”) to every request and further object to every request as “vague, ambiguous, overbroad and unduly burdensome.”

"Debtors further improperly assert the attorney-client
privilege and work-product doctrine claiming that general facts are privileged."

The requests are, for example, that: "Counsel for the Debtors, Weil, Gotshal & Manges LLP, et al., were the sole negotiators of the Proposed Global Settlement Agreement for the Debtors."

Presumably they are asking this because they want to argue that Weil Gotshal was conflicted, and its conflict of interests should void the settlement. If they were the "sole" negotiators, the route from point A to point B is straighter and narrower.

I'll keep an eye on this.

WaMu bankruptcy

The Delaware bankruptcy court has authorized a study of the circumstances that led to the bankruptcy of Washington Mutual by Joshua Hochberg of the law firm McKenna Long & Aldridge.

This was part of those overly dramatic days of the fall of 2008. The FDIC seized the operating company, i.e. the actual bank, and unceremoniously sold it to JP Morgan Chase. This was all done hurriedly. As Sorkin wrote, "The FDIC typically conducts seizures of troubled banks on Friday evenings, to allow regulators time over the following weekend to readsy the institution to open under government oversight on Monday. But WaMu was deteriorating so rapidly -- nearly $17 billion had been withdrawn in ten days -- that the regulators had no choice," but to run the auction on Wednesday and effectuate the seizure on Thursday.

That didn't involve a bankruptcy court at all. But immediately thereafter its holding company (WMI) filed for bankruptcy protection. All this happened so quickly that no one had a chance to work out which assets belonged to WaMu and which to WMI, so they proceeded to argue that out in court. In a development that may have helped generate some changes in the law, JPMC sought full disclosure of all information called for by Bankruptcy Rule 2019(a), not just the names of the members of the WMI Noteholders Group and the aggregate value of their interests. Following the 2005 decision of the United States District Court for the Southern District of New York in In Re Northwest Airlines Corp., the court granted JPMC's motion and ordered full compliance back in December 2009.

It appears, though that the issue of disclosure in other forms is still bedevilling this particular bankruptcy proceeding.

Anyway, I look forward to an enlightening report from Hochberg.

WaMu agreement near

Just a quick note, because this has been a very busy weekend for me.

On Thursday, the judge presiding over the bankruptcy of WMI (the former holding company of Washinton Mutual) postponed a hearing on WMI's dispute with JPMorgan, because lawyers told the court that settlement talks were well advanced.

Casual observers of such matters may not be aware that there was a WMI filing. The operating company itself, WaMu, didn't go bankrupt during those hectic days of the fall of 2008. Rather, the Federal Deposit Insurance Company, acting as receiver, simply seized it and sold “substantially all” WaMu’s assets to JPMorgan Chase, Inc. (JPMC). At the same time, the holding company, WMI, remained in existence, and did file for bankruptcy.

This was all done hectically without a lot of attention to specifics, such as which assets remain with which of those entities. The resulting litigation has generated a lot of paperwork, and some intriguing disputes on contested points of bankruptcy procedure.

A timeline for the fall of WaMu

Feel free to correct me about any of the particulars below. It does seem that the forced sale of the assets of the operating company, Washington Mutual, and the bankruptcy filing of the Holding Company, were both key events in the financial chaos of the autumn of 2008, and here is a simple effort to set forth some pertinent facts in chronological order.

We begin our timeline while WaMu is still engaged in a buying spree.

2002, purchases HomeSide Lending Inc., a major mortgage lender.

2003, Chief Executive Officer Kerry Killinger says, "We hope to do to this industry what Wal-Mart did in theirs."

2005, purchases Providian Financial Corp., thereby becoming a large player in the credit card business.

2006, purchases Commercial Capital Bancorp, the third largest player in the multi-family residence lending market in California.

2006, WaMu bans referral fees from banks to agents, fearing they could be construed as illegal payments. But the ban is only unevenly applied within the organization.

October 2007, WaMu enters a period of consistent heavy losses as its easy-money "power of yes" policies meet the great "no" of a collapsing housing market.

February 2008, WaMu introduces the "Whoo Hoo" advertising campaign, applies to register a trademark in the phrase. But by this time, the view from the executive suites would have been better expressed by another Simpson expression, "D'oh!"

March 2008, Killinger calls Jamie Dimon, CEO of JPMorganChase, to talk about a merger -- in effect, putting his company up for sale. On March 16, a JPM team went to Seattle for talks with WaMu.

April 2008, JPM makes an offer of $7 billion. It is rejected.

July 22, 2008, WaMu posts a loss of $3.3 billion for the second quarter.

September 8, Ratings agencies downgrade WaMu, and its stock price plummets. The board fires Killinger, replaces him with Alan Fishman

From Sept. 9 to September 18, depositors withdraw a total of $16.7 billion.

September 14, [Sunday] Lehman Brothers files for bankruptcy, guaranteeing market chaos through the following week.

September 15 - 19, Hell week on Wall Street. WaMu stock price falls to $2.01.

September 19, Sheila Bair, of the FDIC, calls Dimon of JPM and tells him to think about taking over WaMu.

September 24, JPM's head of retail, Charlie Scharf, submits a bid of $1.888 billion for WaMu's assets to the FDIC. This is the winning bid. It is regarded by some as on the high side under the circumstances, though significant lower than the $7 billion they had offered for the company in April.

September 25, FDIC seizes WaMu, makes the deal official.

September 26, The holding company, WMI, enters bankruptcy in Delaware.