WaMu reaches final hurdle to exiting bankruptcy


By Tom Hals

WILMINGTON, Delaware (Reuters) - Washington Mutual Inc <WAMUQ.PK>, whose bank collapsed during the height of financial panic in September 2008, will ask a bankruptcy judge on Wednesday to approve its plan for repaying creditors.

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In the biggest bank failure in U.S. history, federal regulators seized Washington Mutual Bank and sold it to JPMorgan Chase & Co <JPM.N> for about $1.9 billion.

The next day, the bank's holding company filed for bankruptcy and set off two years of legal battles over who owned what and how bondholders would be repaid.

Most of those disputes have been settled, in part because of about $2.8 billion in tax refunds stemming from a government stimulus package, but the U.S. bankruptcy judge overseeing the proceedings in Delaware will have to consider hundreds of objections before approving Washington Mutual's plan.

"It's going to be a real three-ring circus this week," said analyst Kevin Starke of CRT Capital Group, a Stamford, Connecticut-based broker-dealer that focuses on distressed securities.

The proceedings will effectively mark the end of Washington Mutual, which after bankruptcy could reorganize around some limited operations to preserve tax credits.

Founded in Seattle in 1889, the company was once the largest U.S. savings and loan, with 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 just 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 former stock market darling known for its "power of yes" tagline into a favorite of short-sellers. In the bank's final two weeks in 2008, jittery depositors pulled $16 billion.

The court proceedings will kick off with a hearing to decide who owns $4 billion of securities -- a group of hedge funds or the bank that was sold to JPMorgan.

At issue is whether a "conditional exchange" took place just prior to the bankruptcy. The exchange would have swapped the securities for preferred stock in Washington Mutual Inc, which in turn became worthless when the holding company filed for bankruptcy.

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.

The plan offers nothing to shareholders, who have brought most of the hundreds of objections to it. They have been a constant presence and have often packed the 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.

They painted a picture often at odds with findings of congressional investigations that have described WaMu as an institution that polluted the financial system with dodgy loans. A court-appointed examiner also found little to back up the shareholders' claims.

Judge Mary Walrath has scheduled hearings through Friday, but analyst Starke said they could stretch into next week, depending on how much time she dedicates to shareholders.

"There's actually not a tremendous incentive to rush out of bankruptcy," said Starke, who noted the tax treatment would be more favorable if the company exited bankruptcy next year.

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