WILMINGTON, Delaware (Reuters) - Shareholders of Washington Mutual Inc are “highly unlikely” to recover anything from the bankruptcy stemming from the biggest bank failure in U.S. history, a court-appointed examiner said on Monday.
The examiner wrapped up a three-month investigation into an agreement between JPMorgan Chase & Co and a federal regulator aimed at ending Washington Mutual’s two-year bankruptcy.
His conclusions were welcomed by the company, but will be a blow to shareholders, who stand to get nothing under the company’s proposed reorganization.
The examiner, Joshua Hochberg, determined that “the proposed settlement will most likely result in no recovery for any classes of shareholders under the plan. The examiner also concludes that further litigation concerning any disputed asset is highly unlikely to materially to benefit classes that are ‘out of the money.’”
An attorney for the official committee of equity holders declined to comment.
The report digs through the final months leading up to Washington Mutual’s collapse into Chapter 11 the day after regulators seized its bank operations and sold them to JPMorgan Chase & Co for $1.9 billion.
The bank’s failure came at the height of the 2008 financial panic and followed a $16 billion run on deposits.
The report recalls the fears at the time of a wider financial meltdown, concerns about Washington Mutual’s hidden toxic assets and FDIC jitters that its deposit insurance fund would be rendered insolvent by a large bank failure.
What the 353-page report does not uncover is a smoking gun.
The examiner did not seem to find conspiracies to benefit JPMorgan while wiping out the investments and life savings of thousands of Washington Mutual shareholders, as some shareholders had hoped.
“The examiner’s report reaffirms our long-standing belief that the global settlement agreement will result in significant recoveries for the estate’s stakeholders and is in the best interests of the estate,” said a statement from Washington Mutual.
Hochberg was charged with examining a settlement among JPMorgan, the Federal Deposit Insurance Corp and Washington Mutual over how to divide billions of dollars in disputed assets such as tax refunds and bank deposits.
That settlement forms the basis for the company’s plan to distribute more than $7 billion to creditors and end Washington Mutual’s two years in bankruptcy. The plan has wide support among creditors.
The report did find the bidding process for the seized bank was “less than optimal,” citing contacts between FDIC Chairman Sheila Bair and JPMorgan’s chief executive, Jamie Dimon.
JPMorgan declined to comment.
The FDIC said: “The Examiner’s report confirms the settlement is fair and there has been no undue influence on any party.”
It also found that JPMorgan was able to make changes to the FDIC’s purchase and assumption agreement even though other bidders were told it was nonnegotiable.
“While the foregoing facts suggest that the sale process could have been better, they do not, in the examiner’s view, suggest an unfair process under the circumstances or that a different process would have changed the outcome,” the report said.
Shareholders had hoped Hochberg’s report would turn up billions of dollars in hidden assets in the form of legal claims that could be asserted against JPMorgan and regulators.
One of the final hurdles for Washington Mutual is a dispute over $4 billion of trust preferred securities the company says were converted into essentially worthless preferred stock at the time of the bank seizure.
Holders of the securities argue the conversion did not happen and will make their case in a lawsuit that will go forward with the company’s hearing to confirm its reorganization plan on December 1.
The examiner’s report discussed the conversion which, according to the report, seemed to leave even some of the participants who took part in the conversion uncertain if the transaction had taken place.
An attorney for the holders of the trust preferreds did not immediately return a call for comment.
The case is In re Washington Mutual Inc, U.S. Bankruptcy Court, District of Delaware, No. 08-12229.
Reporting by Tom Hals; editing by Gary Hill, Gunna Dickson and Andre Grenon