The 9/09 MOR for WMI shows, page 7:
* Total assets = $6.9 billion
~~~ which includes ~~~
* “unrestricted cash and cash equivalents” = $4.6 billion

That $4.6 billion appears to be held the following ways, page 3:
* deposit WMB/JPM = $262 million
* deposit WMB/JPM = $3,674 million
* deposit WMB/JPM = [a few $thousand]
* deposit WMB/JPM = [less than $1 million]
* money market BofA = $13 million
* general BofA = $4 million
* net value – short-term securities = $648 million

Grouping these:
* total on deposit at JPM = $3,936 million
* total on deposit at BofA = $17 million
* net value – short-term securities = $648 million

So WMI has a little money at BofA which it can presumably access readily. It has a lot of money at JPM which it can’t access. Then, it has over half a billion in ST securities which appear to be considered cash equivalents, so ought to be able to be turned into cash if needed.

For 9/09, WMI reported a negative cash flow, page 3:
* WMI total receipts = $1.33 million
* WMI total disbursements = $9.50 million
* net cash flow = ($8.17 million)

For the last three MORs, the average total disbursements is $8 million per month.

It seems that WMI may not be hurting for cash right now, even with the JPM deposits locked up. If it is correct that WMI can tap into the ST securities for cash, they ought to be able to continue the fight for as long as necessary.

The text below is quoted from WMI’s filing on 7/16/09.

WMI “alleges that the FDIC sold the assets of WMB to JPMC for less than their liquidation value. While the FDIC asserts that this claim is merely “speculative,” the publicly available facts indicate that WMB’s assets were worth substantially more than the $1.88 billion JPMC paid. Indeed, in less than one year from the acquisition, JPMC already has recognized a profit from this transaction far in excess of the purchase price. The FDIC breached its irrefutable obligation to maximize the value of WMB’s assets.

Now the FDIC seeks to avoid accountability by shifting the loss onto WMI. The Federal Deposit Insurance Act (“FDI Act”) and the Just Compensation Clause of the Fifth Amendment both require that WMI be compensated for the FDIC’s failure to pay to WMI their portion of WMB’s liquidation value.

As a separate but related issue, the FDIC also took possession of property that WMB did not own or that WMB was required to return to WMI. Because that property was not property of the receivership estate, the FDIC has converted it. WMI also must be compensated for this conversion.”

“The FDIC seeks to have this Court interpret the law in a manner that grants the FDIC unlimited discretion, completely immunizing its actions from any review, and unlimited power to resolve a bank in receivership – without regard to the actual powers and duties Congress provided in the FDI Act…The FDIC’s position is fundamentally lawless and should be rejected. The FDI Act required the FDIC to maximize the value of WMB’s assets for the benefit of WMI and the receivership’s other claimants.  The FDIC failed to do so…”

“The FDIC attempts to justify its breach…by asserting that the sale to JPMC resulted in no cost to the deposit insurance fund. Because WMB’s assets were worth significantly more than its deposit liabilities, selling WMB for more than those liabilities was neither difficult nor laudable. Indeed, it suggests a motive for the FDIC’s breach. In the ordinary case, a bank placed into receivership is sufficiently insolvent that its assets are not sufficient to cover its insured deposits, much less the amounts owed to other creditors. Here, however, WMB’s assets substantially exceeded its deposit liabilities, and the FDIC lacked its usual economic incentive to maximize the value of the receivership’s assets. Therefore, the FDIC ignored its obligations to the WMB receivership’s claimants. This Court should not allow the FDIC’s conduct to go unexamined.”

“The FDIC argues that WMI’s allegation that the FDIC sold WMB’s assets for less than their liquidation value is merely “speculative””…but WMI’s “allegations are far from speculative. Immediately after the transaction, JPMC projected that the transaction would add $2.4 billion to JPMC’s net after tax operating income in 2009 alone. JPMC expected the transaction to be immediately profitable…JPMC has recently announced that it is now poised to recognize significant gains (i.e., as much as $29 billion), as it recognizes the actual market value of many of the WMB assets it purchased. Furthermore, JPMC recorded negative goodwill in accounting for the transaction – indicating that, immediately upon consummating the transaction that the fair market value of assets acquired exceeded the purchase price. Such negative goodwill is unheard of in a major acquisition. Indeed, the facts surrounding JPMC’s purchase price are sufficiently suspicious that one U.S. Senator has called for an investigation.

Finally, shortly after WMB was placed into receivership, the FDIC attempted to broker a sale of Wachovia, announcing a letter of intent to sell Wachovia to Citigroup for approximately $2 billion. Wells Fargo announced only a few days later that it was willing to purchase Wachovia for more than $15 billion. The fact that Wells Fargo was willing to purchase Wachovia on terms substantially superior to the original deal arranged by the FDIC calls into question the FDIC’s commitment to negotiating the best price for a troubled bank. Indeed, this episode demonstrates the FDIC’s indifference to its obligation to negotiate a fair market price once the deposit insurance fund no longer stands to suffer a loss.”

“The FDIC has a duty to maximize the value of the Receivership’s assets when it liquidates the Receivership estate. The FDI Act specifically commands the FDIC to maximize the value of such assets. (“When a depository institution fails, the FDIC has statutory responsibility to the creditors of the receivership to recover for them, as quickly as it can, the maximum amount possible on their claims.”)(“When an insured institution fails, the FDIC is ordinarily appointed as receiver. In that capacity, it assumes responsibility for efficiently recovering the maximum amount possible from the disposition of the receivership’s assets…”.)”

“The FDIC argues that it is not so obligated because the FDI Act requires the FDIC to seek the “least cost resolution” of a failing bank…[however,] maximizing the value of the receivership estate enhances the likelihood that the FDIC will recoup the loss to the deposit insurance fund and is therefore consistent with the “least cost resolution” of a failed bank.”

“Even if the FDI Act did not provide WMI with a direct right of action against the FDIC, WMI still may recover damages from the FDIC under the theory of illegal exaction. An illegal exaction is money that was “improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation.”…The FDI Act obligated the FDIC to liquidate WMB’s assets for their maximum value, and then distribute the proceeds to WMB’s creditors (such as WMI)…Rather than paying the liquidation value owed to WMI under the FDI Act, the FDIC transferred that value to JPMC. By doing so, the FDIC illegally exacted money due to WMI.”

“The FDIC sold WMB’s assets to JPMC for less than their liquidation value. One might presume that the FDIC believed that the sale of WMB to JPMC for less than its liquidation value served public policy in some way. However, whether the FDIC had a valid public policy rationale for the JPMC sale is not the issue. Rather, the issue is whether the FDIC can force WMI to bear the loss, notwithstanding their property interests in WMB. To accomplish the JPMC sale, the FDIC sacrificed WMI’s liquidation rights, shifting money that they would have received to JPMC, to accomplish whatever public policy goal the FDIC thought the JPMC sale served. The FDIC must compensate WMI for the property that it took – the difference between the liquidation value of their property interest in WMB and the fraction of that value that actually will be paid due to the P&A Agreement’s sub-liquidation purchase price.”

“As the FDI Act itself recognizes, the creditors and shareholders of a failed bank continue to have a property interest in the liquidation of the assets of the bank…The receivership process, similar to the bankruptcy process, is a system to allocate the remaining assets of the failed bank among the claimants of the failed bank…(“As receiver for the failed bank, the FDIC acts much like a trustee in bankruptcy, marshalling the assets and legal interests of the bank and distributing its assets to creditors, including the bank’s depositors.”). When the FDIC sold WMB for substantially less than its liquidation value, it expropriated WMI’s property and transferred it to JPMC. That expropriation is a taking of WMI’s property for which compensation is due under the Just Compensation Clause.”

“For the foregoing reasons, Plaintiffs respectfully request that this Court deny FDIC-Receiver’s Partial Motion to Dismiss and FDIC-Corporate’s Motion to Dismiss.”

A. Capital Contributions: by WMI to WMB (JPM)
– constructive fraudulent transfers
– value $6.5B

B. Trust Securities: WMI owns but value went to WMB (JPM)
– constructive fraudulent transfers
– value $4.0B

C. Other transfers: by WMI to WMB, fsb, or for benefit of WMB
– constructive fraudulent transfers
– value $3.4B

D. WMI received less than reasonably equivalent value for WMB when sold to JPM
– unliquidated – no value specified
– catch-all for total value not included in other claims?

E. Intercompany Accounts: owed by WMB to WMI (does NOT include $4B cash in DDA)
– 177M + 22M + 490M
– value $0.7B

F. JPM unauthorized, intentional, and infringing use of WMI intellectual property
– trademarks/service marks, patents, copyrights
– value of WAMU brand alone $6.0B

——————————————————-
TOTAL value = $20.6 billion + unliquidated claims
——————————————————-

JPM has been trying in any way it can to stop or dismiss the two bankruptcy court adversary proceedings (lawsuits) and/or transfer them to Wash. D.C. court, where WMI sued FDIC, and this has been going on for three months now with continued denials from the judge. JPM’s latest attempt was to file a ‘notice of divestiture’, which they claimed was all that was needed to achieve what they have been denied over the past three months. The judge wasn’t buying this.

Quotes from the transcript of 9/25/09 hearing:
WMI:
“Just to put this in context, JPMC made motions asking Your Honor to dismiss or stay these proceedings, and Your Honor considered it and rejected it and said, No, these cases will go forward. The cases went forward. [JPM] filed notices of appeal. Two months have passed since they filed the notices of appeal. In that time they’ve asked for a deposition and taken it. They’ve negotiated discovery. They’ve served motions. They’ve served discovery. They argued a motion to dismiss, which they then lost. After all this happened over the course of the two months… they turn around and essentially what they’re saying is, “Guess what, Your Honor, that motion, that relief that we asked for and that you rejected, we’re giving it to ourselves, and the way we’re doing it is we’re simply going to fill out a piece of paper that basically says, ‘Dear Your Honor: This case must stop even though you decided it should go forward.’” This is gamesmanship and it shouldn’t be tolerated.”

Judge:
“Okay. Alright, well, let me issue my ruling. Although I’m not quite sure what I’m ruling on, there is no motion before me. There’s a notice of a divestiture, but I take it the parties are asking me whether the adversary proceeding will proceed, and in my opinion, yes, it will proceed… The fact that JPMC has continued to appear before me and to continue to proceed with this adversary for the past four months, I think evidences an acknowledgment that really their position is frivolous. Need I say it, I do say it, the argument is frivolous that the collateral order doctrine applies. With respect to the merits of the appeal, I’ve already made my ruling on that numerous times. I need not issue it again. I think the decision of JPMC that I do not have jurisdiction is frivolous. The adversary proceedings will proceed until and unless the Appellate Court decides otherwise, but they need not be held up pending that appeal.”

The WMI attorney then requested that a hearing date be scheduled for WMI’s motion for summary judgement on the $4 billion cash issue. WMI asked for Oct 8-10, but there were judge scheduling issues so this was left until after the hearing ended, and we have not been able to find out what was scheduled. The clear message, however, is that WMI strongly believes that they will win the summary judgement ruling, and they want it sooner rather than later.

Earnings Release Financial Supplement — Third Quarter 2009, Exhibit 99.2: begins about one quarter of the way down. Page numbers are from that exhibit section.

Page 3,  STATEMENTS OF INCOME:
Footnote (c): “JPMorgan Chase acquired the banking operations of Washington Mutual Bank for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with U.S. GAAP for business combinations, nonfinancial assets that are not held-for-sale were written down against that negative goodwill. The negative goodwill that remained after writing down nonfinancial assets was recognized as an extraordinary gain.”

Extraordinary gain(c) per quarter from WMB acquisition:
3Q08 = $581 M
4Q08 = $1325 M
1Q09 = $0
2Q09 = $0
3Q09 = $76 M
Thus total extraordinary gain from WMB acquisition = $1.982 billion

Page 3, DILUTED EARNINGS PER SHARE:
3Q08:
– (8 cents) = income (loss) before extraordinary gain
– 17 cents = extraordinary gain from WMB acquisition
– 9 cents = net income

4Q08:
– (29 cents) = income (loss) before extraordinary gain
– 35 cents = extraordinary gain from WMB acquisition
– 6 cents = net income

3Q09:
– 80 cents = income (loss) before extraordinary gain
– 2 cents = extraordinary gain from WMB acquisition
– 82 cents = net income

Conclusions:
– Because in the acquisition of WMB “the fair value of the net assets acquired exceeded the purchase price”, this resulted in “negative goodwill”, which resulted in an “extraordinary gain” on JPM’s books.
– For the 3rd quarter of 2008, this extraordinary gain changed what would have been a net income loss of 8 cents per share into a gain of 9 cents per share.
– For the 4th quarter of 2008, this extraordinary gain changed what would have been a net income loss of 29 cents per share into a gain of 6 cents per share.
– These numbers reflect only the “extraordinary gain” resulting from the “negative goodwill”. JPM projected in its 1st quarter 2009 10-Q that overall:  “…the net income impact of Washington Mutual’s banking operations could be approximately $0.50 per share in 2009.”

What is “negative goodwill” (from 7/16/09 WMI  D.C. filing)?
Roman L. Weil & Michael W. Maher, Handbook of Cost Management 95-96 (2d ed. 2005): defining “negative goodwill” as “[w]hen a firm acquires another company, and the fair market value of the net assets acquired exceeds the purchase price . . .  For negative goodwill to exist, someone must be willing to sell a company for less than the fair market value of a net current assets and marketable securities.  Because such bargain purchases are rare, one seldom sees negative goodwill in the financial statements . . . .”

From yesterday’s share price action, one might conclude that the hearing went very badly. And from the media reports, one might reach the same conclusion. Here’s a typical report, from the hometown Seattle Times: “The judge gave no indication when she might rule on WMI’s motion for summary judgment.”

Here’s what the judge actually said at the conclusion of the hearing: “Well, I’m going to hold this matter under advisement. I do thank the parties, though, for very good oral arguments, and briefing as well. I’ll endeavor to get something out as soon as possible.” In this case, ‘something’ is her ruling.

The hurdles for obtaining a summary judgment in a lawsuit, and thus avoiding a full trial, are high. Most motions for summary judgment are denied, but in this instance the judge did not deny the motion ‘from the bench’ and indicated a ruling would soon be forthcoming.

I listened to the entire hearing via conference call. My impressions of a convincing presentation by the lawyer for WMI, and not very coherent presentations by lawyers for JPM and FDIC, were confirmed by someone who actually attended the hearing in person. Here is what he reported, followed by discussion:
===================================
In addition to learning that BrewHaHa (cafe across from the Bankruptcy Court) has excellent coffee and scones, today’s hearing was very insightful not only for what I heard, but for the opportunity to size up each party’s counsel and the judge, and hear conversations from the gallery of observers assembled.

1. Ellsberg [WMI] delivered a very well articulated argument that from a delivery perspective was presented with confidence and received in a matter of fact fashion by Judge Walrath, and as Ellsberg hammered his argument home there was a great deal back and forth among JPM’s team and poor Sachs [JPM presenting lawyer] looked like he wanted to vomit.

2. Either Sachs [JPM] was under the weather today or his argumentative style matches the weakness and poor structure of his overall argument. Even though JPM and FDIC maintain a similar position on the $4B, the arguments they made from each perspective were disconnected, and in some cases in conflict. Walrath smirked at many points as if counsel was on the fringe and reaching in his effort to defend his position and the need for a full fledged trial on the $4B. Sachs was under visible pressure to deliver. JPM’s argument could be summarized as: “if there was money there [in WMI deposit account] it is OURS; but we are NOT SURE if there was/is money there so we can’t give it to WMI (even though we are calling the money core deposits and paying FDIC insurance premiums on it). Say what? Talk about trying to have it BOTH ways – Walrath’s body language communicated the same.

3. FDIC’s attorney did all but threaten both WMI and the Walrath court [see below], which Ellsberg addressed in his rebuttal very well. During the FDIC attorney’s argument, I found it was delivered simply as a warning to Walrath: no matter what you do, we’ll use our power to grab the money “in flight” before it can be transferred to a non-JPM account held by WMI. Eyebrow raising for sure but the judge seemed unwavering in her concentration and seemed underwhelmed as if to say “is this all you’ve got?”

4. Big Money was represented in the room. Although only attorneys had to sign in today, it was evident by the pre-trial conversations that hedge funds and other investor types in very expensive suits took the train down from the greater NYC area to SEE for themselves how this was proceeding. All, including myself, sat behind Team WMI led by Quinn Emmanuel et al with one eye on the showmanship and another on our blackberrys communicating back to a home base or trading minions.

5. More journalists today. Although this is the first hearing I have been at, and it is back to Wisconsin for me tomorrow, there were no less than 4 “back benchers” dressed in casual attire busily typing away from start to finish.

Overall impression: Nothing about my investment thesis was impacted today. As mentioned by JPM/FDIC counsel, WMI is arguing illegal seizure and fraudulent transfer, and that this $4B is one asset of many fraudulently transferred to JPM by result of the OTS and FDIC’s accelerated auction process 13 months ago.

JPM/FDIC’s accusation of fraudulent activities on the part of WMI management is irrelevant and beside the point as they are the unholy alliance that placed WMI in Chapter 11 today. This WMI estate, and not external or subordinate claims, is the sole focus of Walrath’s perspective. JPM/FDIC’s sideshow and misdirection was not spectacular at all. I believe Walrath will provide clarity and focus on the core issues surrounding this estate very soon. She seemed to be loosing patience with the slug-like pace JPM’s team is taking on issues that are fairly basic and consistent.

The open question in my mind is that if Walrath does NOT rule in WMI’s favor on the $4B; what other genuine leverage does she have to get the parties back to settlement table to finalize a global settlement?
—————-
Comment from the bankruptcy lawyer:
“JPM’s lawyers are obviously fighting both the judge AND their client. They have no choice but to pursue any legal delay tactic, however specious, and the message to JPM is obviously: “Sooner or later she’s going to rule against us; there’s just so much we can do.” This was clearly indicated by JPM attorney’s body language: he knows his case is untenable and knows the judge knows. Thank you for bringing us that visual information. I find it highly significant.

JPM’s implicit threat to their law firm is: “Do you want us to get Paul Weiss or one of the other Wall Street firms to take over?” Although it is obvious Jamie Dimon is really running this show and was ‘present’ in that courtroom (I wouldn’t be surprised if his general counsel had a hook up so that he could hear without officially signing in). What is not obvious is why WMI continues to forebear on the Rule 2004 investigation of JPM (i.e., no depositions). It may be that their investigations have not yet yielded a fatal smoking gun, or it may be that they’re not ready to go nuclear.”
===================================

Discussion of the hearing:
Comment:
“Judge Walrath said she would take the matter under advisement and issue a ruling as soon as possible. Of course we don’t know how the judge will rule, but if the judge were going to deny the motion outright, she probably would have just ruled from the bench and said ‘Motion is Denied.’ Since she did not do that, the outcome for the debtors is looking pretty good, as even JPM probably agrees. I’m wondering if JPM might do something desperate like empty the accounts and give the money to the FDIC-Receiver and then leave WMI with an empty sack if they get possession of the accounts. While that would be damaging for our hopes in the short run, in the long run it would help us by showing the lengths that JPM and the FDIC would go to conspire against WMI and frustrate their estate and that would help us in DC Court and in the court of public opinion.”
—
The bankruptcy lawyer reply:
“JPM CAN’T do that. The $ is property of the estate. Handing it to the FDIC would be violation of the automatic stay (so would the FDIC’s receipt of the money; believe me, they wouldn’t take it) and the sanctions would be fearsome, not to mention the penalties for violating the court’s order to pay the $ to WMI.”
————————————-

Question:
“In an earlier motion JPM clearly stated that WMI was solvent and had the capability to pay their obligations to the day of seizure. Today…they made an opposite statement. Would Judge Walrath consider the flip flop of contradicting statements?”
——
The bankruptcy lawyer answer:
“FYI, JPM made the earlier insolvency claim to head off a fraudulent conveyance action. Yes, all of JPM’s inconsistencies will be used by WMI.”
——
Another answer:
“Yes. Inconsistency is killing JPM. Every time they tell the story, it’s a little different. When someone is speaking the truth, it comes out the same way every time. When the story incorporates falseness, it comes out different every time, depending on the circumstances. That’s why police will have the suspect tell their story repeatedly.”
——
The bankruptcy lawyer:
“If anyone had told me one of the country’s top five law firms would have such a mediocre litigation group I’d have said they were delusional. However, I have now seen it for myself. But JPM’s just too important a client for Sullivan & Cromwell to refuse to make these silly arguments — and flagrant falsehoods.”
===================================

The FDIC’s Threat
Comment:
“The FDIC Attorney, John Clarke, delivered what sounded like an open threat to the bankruptcy judge today. Listening to the audio file (No. 7 at about 10 minutes in) provides his exact words: “If, therefore, the court concludes that JPMorgan’s set-off rights do not preclude turnover here, then the FDIC-Receiver is prepared promptly to exercise its Section 9.5 (of the P and A agreement) rights and to direct JPMorgan to return the account balances to the FDIC-Receiver.”

It’s the conditional part of it that is really, really bad. The FDIC is saying that they will tell JPM to give the money to the FDIC only IF the court rules in favor of turning it over to WMI. That is a huge perversion of the FDIC’s responsibility as the receiver. The FDIC should have already directed JPM to give them the money if that was what their responsibilities required them to do. To come out and say that they will only do that if the judge rules in favor of the debtor is an abrogration of their responsibility as the receiver and also an amazing indicator of their collusional relationship with JPM. It also indicates that they see themselves as acting outside of the law and beyond the jurisdiction of the court. Just amazing.”
————————————-
The bankruptcy lawyer:
“[FDIC] proved they are willing to play dirty and do whatever it takes to keep that money in JPM’s hands, at one point even mumbling ‘We can tell them not to give the money to WMI and allow them to hold onto it’. I said months ago I wasn’t impressed by the ‘bankruptcy’ lawyers chosen by the FDIC. I suspect the firm (DLA Piper) has a lot of lobbying business in Washington and that’s how it got the FDIC’s business. For the upteenth time, if I were the FDIC I would never have chosen these lawyers; they have no standing at the bankruptcy bar.

Anyway the dummy [FDIC's John Clarke] who said this needs to become acquainted with the Bankruptcy Code, because, as I wrote to a few minutes ago, such an action would result in the FDIC being held in contempt of court (possibly including jail) and heavy sanctions. I suspect this idiot knew he did not have the power when he made the threat, he just couldn’t help being nasty; people tend to do that when they’re cornered.”
————————————-
Question:
“Can the FDIC seize WMI’s money if ruled in our favor? That comment shocked me from the FDIC’s attorney.”
—
The bankruptcy lawyer answer:
“No, no, and no. The $ is property of the estate and to interfere with it in any way would be a violation of a court order. The FDIC lawyer was making the emptiest threat I’ve ever heard used in litigation.”
—
Comment:
If the money is the property of the WMI estate, then you are right. If it is the property of the WMB estate, then it would belong to the FDIC-Receiver and if it is the property of WMBfsb, then it would belong to JPM. It would be a desperate action on the part of JPM to transfer the funds out of the disputed accounts but…they may be desperate. Doing such a transfer while the ownership of the accounts is being decided by a federal judge would be a foolish thing to do…but it would be a huge, nay colossal, boost to the WMI v FDIC case in DC court.”
—
The bankruptcy lawyer answer:
“There is no way the $ can be property of WMB. That’s the whole ‘is it a deposit or captial contribution, or loan’ argument, that all can see (even the mighty Sullivan & Cromwell [JPM]) is meritless. The money was a deposit and is therefore property of the estate, and JPM would never move it — to anyone — without obtaining relief from the automatic stay. Everyone should know after today’s hearing that such a turnover order (which will include relief from the automatic stay) is forthcoming, and it will EXPRESSLY say the $ is to be given to WMI.”
————————————-
Question:
“Can you reply to the assertions that the FDIC has the right to seize any deposit it so chooses within the current WMB because of the P&A agreement?”
—
The bankruptcy lawyer answer:
“The answer is lodged in the 5th and 14th Amendments. Neither FIRREA nor any act of Congress can override these laws. Simply stated, the limited circumstances where the FDIC can claim an interest in deposited funds are NOT present here. Believe me, if the FDIC had a colorable claim to the $, you’d have heard it.”
————————————-

Follow up from the bankruptcy lawyer:
“A number of people were unnerved by [FDIC's] John Clarke’s threat to compel JPM to give the FDIC the $4 billion. There is no reason for any concern.

A debtor’s estate consists of “ALL legal OR equitable interests of the debtor in property” as of the commencement of the case. Section 541(a).[link] Congress made this very broad description of estate property for a reason: to prevent creditors from claiming that property in question doesn’t come within the definition of Section 541. As you can see, any conceivable type of property is covered by Congress’ definition, including bank deposits.

Property of a bankruptcy estate cannot be interfered with absent court order. See Section 362(a)(3). [link]. Moreover, that protection is in effect until, among other things, (1) the property is no longer property of the estate (362(c)(1)), or (2) the case is dismissed (362(c)(3)), which is what many of us expect will happen in a settlement.

The writings and depositions WMI has submitted to the court are compelling evidence that the money belongs to WMI, though the court has not ruled on the matter. This evidence is enough to trigger the protection of Sections 362 and 541 — and Clarke knows it.

The only thing that could override the protections in Sections 362 and 541 would be a FIRREA provision placing authority to adjudicate the money in the hands of the D.C. district court, notwithstanding Chapter 11. Such a provision only exists in the FDIC’s dreams, because if it existed Clarke et al. would have cited it in neon lights. As there is no such provision, Clarke wouldn’t dare tell the FDIC to compel JPM to turnover the money (JPM wouldn’t do it anyway for fear of violating the automatic stay).

Every lawyer in the courtroom knew that Clarke was making a fool of himself, and the only people who were frightened were some lay people here and day traders fearful the FDIC could drag things out. While the latter is certainly possible, both JPM and the FDIC know they can’t move that money without Judge Walrath’s consent, and from what I know about this case that isn’t forthcoming.”
===================================

Final question:
“Curious what your take on today is?”
——–
The bankruptcy lawyer answer:
“The judge measured JPM for a coffin.”

The Little Known Story of Washington Mutual
(copyright 2009 Jamie-JJ)

On Sept. 25, 2008, the FDIC seized Washington Mutual Bank (WMB), placed it into receivership, and immediately sold all of its assets and some of its liabilities to JPM for $1.888 billion. JPM acquired WMB’s deposit liabilities but not other liabilities. The FDIC reported that the seizure of WMB and sale to JPM was accomplished at zero cost to the FDIC. On Sept. 26, 2008, WMB’s parent holding company, Washington Mutual Inc. (WMI), filed for Chapter 11 bankruptcy protection.

At the time of its seizure, WMB had $307 billion in assets, $188 billion in deposits, 2239 branches, 4,932 owned and branded ATMs, two credit card divisions, and 43,198 employees. WMI was the sole stockholder of WMB, and WMI lost $26 billion when its WMB stock became worthless due to the seizure.

In April 2008, JPM had tried to purchase WMB from WMI. JPM was given extensive access to WMB’s books and signed a confidentiality agreement, as well as an agreement to not purchase WMB from any other seller. JPM’s offer of $8 per common share was rejected by WMI as too low. Shortly thereafter, a group of investors raised $7 billion for a capital injection into WMB.

In early September 2008, WMI reported that WMB continued to maintain a strong liquidity position and had capitalization ratios that were above the regulatory requirements for well capitalized institutions. Prior to the seizure of WMB, federal regulators (OTS) never ordered WMB to raise additional capital or increase its liquidity, and an OTS fact sheet released on the day of WMB’s seizure noted that WMB was well capitalized at the time of seizure. WMI had access to $50 billion in short-term liquidity from the Fed’s secondary window but never utilized it.

WMI’s Chapter 11 legal team believes that the FDIC committed two major errors in the seizure of WMB: (1) some of the seized assets belonged to WMI, not WMB, and therefore the FDIC did not have legal right to seize these assets; and (2) the FDIC sold the assets of WMB, which it did have legal right to seize, for less than fair market (liquidation) value. The FDIC has a duty to maximize the value of a receivership’s assets when it liquidates a receivership estate; the FDI Act specifically commands the FDIC to maximize the value of such assets. WMI has received $0 compensation for the loss of WMB because the FDIC has retained the $1.888 billion paid by JPM.

WMI has backed up these beliefs with lawsuits against both FDIC and JPM. WMI has not challenged the legal right of the FDIC to seize WMB; it is clear that the FDIC did have this right. The major basis of WMI’s claims is simple: WMI did not receive fair value for its assets which were seized by the FDIC, and WMI is therefore entitled to compensation for the difference between the fair value and the actual amount received ($0). Altogether the compensation requested for these two types of FDIC errors is in the tens of billions of dollars. WMB’s book value at the time of seizure is estimated to have been well over $20 billion, and a going-concern valuation yields a figure even greater than this.

Interestingly, WMI (apparently unbeknownst at the time to either FDIC or JPM) had  approximately $4 billion in cash on deposit in WMB at the time of seizure. This cash is now on deposit with JPM, and WMI has sued to have this large amount of cash turned over to their estate in bankruptcy court. JPM has refused to release this cash and disputes that it is in a demand deposit account or that WMI has legal right to it.

Finally, WMI has sought and obtained, over the strong objection of JPM, the bankruptcy court’s permission to investigate JPM for a variety of potentially tortious activities in the several years prior to the seizure of WMB. Included are allegations that JPM engaged in sham negotiations earlier in 2008 (while preparing its $8 per share offer for WMB) designed to elicit confidential information from WMI, and that JPM misused and publicly leaked this confidential information to gain an unfair advantage in obtaining WMB’s banking assets, which had long been coveted by JPM.

Major court actions:
—-Washington D.C. District Court—-
(1) WMI sued the FDIC (3/20) for takings, conversion, and constructive fraudulent transfer. These claims are based on: (a) the FDIC did not obtain fair value for WMB assets seized, and (b) FDIC seized additional assets that were property of WMI, not WMB. Specified claims are ~$13 billion, and there are additional unliquidated claims.
—-Delaware bankruptcy court—-
(1) JPM adversary proceeding: JPM sued WMI (3/24) to try to preemptively settle claims for disputed assets. WMI responded with 18 countersuits (5/29), most of which are grounded in the legal theories of constructive fraudulent transfer and preferential transfer, with additional claims for I.P. infringement (copyright, trademark, patent);
(2) Turnover proceeding: WMI sued JPM (4/27) for turnover of the ~$4 billion of cash; WMI has asked for summary judgment (5/19);
(3) Rule 2004 examination: WMI asked for (5/1) and has received permission (6/24) to investigate JPM for business tort claims for actions that took place prior to the seizure of WMB in September; subpoenas for document production have been served on JPM (7/6); WMI seems to have agreed to allow a delay in document production.

Soon after WMI filed their first lawsuit, against FDIC in March 2009, a corporate bankruptcy lawyer wrote:
“You are about to see the awesome power of Chapter 11 unleashed on both a government agency and the nation’s most powerful bank. Watch and learn.”

Over the past six months, those who have been watching have indeed learned about the power that a Chapter 11 bankruptcy judge wields protecting her Debtor and attempting to maximize the value of the Debtor’s estate for the benefit of its creditors.

The major rulings so far in bankruptcy court (little significant action in D.C. court so far):
- FDIC and JPM attempts to invoke FIRREA jurisdictional bar: denied
- FDIC and JPM motions to stay two adversary proceedings or remove to D.C.: denied
- WMI Rule 2004 motion to examine JPM: approved
- JPM motion for reconsideration of Rule 2004 motion approval: denied
- WMI subpoena of JPM for Rule 2004 documents: served
- JPM motion to dismiss WMI’s 18 counterclaims: denied
- JPM attempts to categorize the two adversary proceedings as non-core: denied
- JPM attempt to divest bankruptcy court of authority pending appeals: denied as frivolous

Information from JPM’s financial statements filed since WMB seizure:
(1) Immediately after the purchase of WMB from FDIC, JPM projected that the transaction would add $2.4 billion to JPM’s net after tax operating income in 2009 alone. Thus, JPM expected the transaction to be immediately profitable.

(2) JPM 1st quarter 2009 10-Q:  “…the net income impact of Washington Mutual’s banking operations could be approximately $0.50 per share in 2009.” JPM has 3.76 billion shares of common stock, so at 50 cents per share that’s $1.88 billion net income in one year attributable to the acquisition of WMB. Interestingly, JPM paid $1.88 billion to the FDIC for WMB.

(3) In explaining an amount accounted for on balance sheets as an “extraordinary gain”, the 10-Q states “JPMorgan Chase acquired the banking operations of Washington Mutual Bank for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price…” This latter fact is the basis for the lawsuit against the FDIC and also many of the claims against JPM.

(4) JPM recorded negative goodwill in accounting for the purchase of WMB from FDIC, indicating that, immediately upon consummating the transaction, the fair market value of assets acquired exceeded the purchase price. Such negative goodwill is unheard of in a major acquisition.

(5) Soon after the purchase of WMB from FDIC, JPM wrote down $30 billion in WMB assets due to estimated future loan losses (commonly referred to as “toxic loans”). On May 26, 2009, Bloomberg reported the following on the reported $30 billion in losses: “JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.” In other words, all but $1 billion of the $30 billion write down losses will be negated by the subsequent $29 billion write up.

The MOR is a court mandated filing (“Under US bankruptcy law, companies in Chapter 11 Bankruptcy protection are required to file monthly operating reports with the US Trustee”). There are obviously a number of financial uncertainties for WMI right now; some of these are discussed in the MOR and others (e.g. potential lawsuit recoveries, creditor claims still pending in court, JPM/FDIC claims) are not.

Nonetheless, the MOR appears to be the best source of financial facts we currently have for WMI. All of the calculations below rely on figures solely from the August 2009 MOR, and no other source.

From pdf 7, “Balance Sheet as of 8/31/09″, in millions:
Total assets = $6,940 (includes the ~$4B turnover action cash)
Total liabilities = $8,294
Net liabilities = $1,354

If/when WMI wins the turnover action, we will have a situation where the recovery of an additional ~$1.3 billion is needed to make assets = liabilities and cover all debt, including WAHUQ (junior subordinated debt). Next in line are the preferred shares, WAMPQ and WAMKQ, of equal priority. The totaled value of these preferreds is listed in the MOR as $3.392 billion.

There has recently been discussion of federal tax refunds to WMI. Research by gauntlet281 on recent billing statements suggests that WMI may soon be filing, or have just filed, 2008 federal tax returns, which could result in the realization of tax refunds.

On pdf page 9 of the MOR is “Note 5: Taxes”, which says in part:
“The current estimate for the total expected tax refunds, net of potential payments, is in the range of approximately $2.6 – $3.0 billion.” This issue is complicated by IRS tax-related claims against WMI, but the MOR language does use the phrase “tax refunds, net of potential payments”.

So assuming WMI wins the turnover action and receives the tax refunds, in millions:
Net liabilities = $1,354
Net tax refunds = $2,600 to $3,000
Adjusted net assets = $1,246 to $1,646

How much of the preferreds would these assets cover, in millions?
$1,246 / $3,392 = 37%
$1,646 / $3,392 = 49%

WAMPQ at 37% = $370 pps
WAMPQ at 49% = $490 pps

WAMKQ at 37% = $9.25 pps
WAMKQ at 49% = $12.25 pps

Question: with both the turnover cash and the tax refunds in hand, wouldn’t that justify the approval of an equity committee?