WaMu begins showdown over bankruptcy plan

WILMINGTON, Delaware Wed Dec 1, 2010 11:03am EST

WILMINGTON, Delaware (Reuters) - Washington Mutual Inc WAMUQ.PK begins a showdown with shareholders and dissident hedge funds on Wednesday as it seeks bankruptcy court approval for its proposal to repay creditors, though a dispute about who owns billions in securities could still threaten the plan.

The company's lending business known as WaMu was seized in September 2008, the biggest bank failure in U.S. history, and sold 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, thanks in part to about $2.8 billion in tax refunds stemming from a government stimulus package, but the Delaware bankruptcy court judge overseeing the proceedings will have to consider hundreds of objections.

Kevin Starke, an analyst with CRT Capital Group in Stamford, Connecticut, who has followed the case closely, said the most serious threat to confirming the plan was a dispute about ownership of $4 billion of securities.

Hedge funds said they own the securities. The company and JPMorgan said the securities were assigned to the bank on the eve of bankruptcy, and in exchange the hedge funds were given now worthless preferred stock.

Starke, whose broker-dealer firm focuses on distressed securities, said a ruling in favor of the hedge funds could postpone the rest of the confirmation hearings for new rounds of negotiations to settle the dispute.

Judge Mary Walrath has scheduled hearings to wrap up on Friday, but given the sheer number of objections it could easily run much longer.

Starke noted the recent experience of bankrupt newsprint maker AbitibiBowater Inc, which struggled for a month to have its reorganization approved over just a few objections from holdout investors.

Founded in Seattle in 1889, Washington Mutual 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 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.

(Reporting by Tom Hals, editing by Dave Zimmerman)

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