Buyer Beware! JPMorgan Sees WaMu Value Decline

By Anthony M. Freed

Does anybody really know what a good deal is in this market? Everyone seems to agree JPMorgan received the sweetheart deal of the yearwhen they took over ailing Bear Stearns in a government-backed over the weekend shotgun wedding in March.  

When JP Morgan announced in September that JPMorgan had done it again, this time picking up Washington Mutual’s assets for a song - especially when the deal is compared to Bank of America’s inexplicable and drastically overpriced purchase of Merrill Lynch - it seemed to confirm what everyone has long suspected:   Jamie Dimon truly has the Midas touch. 

The proof it seems will be in the WaMu portfolio pudding, so to speak, and mounting evidence indicates the taste may not be as sweet for Mr. Dimon as was first thought. 

The rapidly evaporating market value of WaMu’s assets left over after JP Morgans cherry-picking is indicative of the biggest problem the nation faces in deciding how best to deal with the mortgage backed securities (MBS) and other toxic instruments that are pulling world markets into recession: How much is this stuff worth? 

First of all, WaMu’s assets could be worth less than originally disclosed based on the lack of quality displayed by the assets held in bankruptcy.  In the terms of the deal with JPMorgan, as “negotiated” by the FDIC in what has been purported to be an illegal action by the government in favor of JP Morgan, the same set of assumptions were applied to all of the assets when determining their value. 

That means JP Morgan, who already anticipates the writedown of tens of billions from WaMu alone, can safely expect WaMu will provide them with tens of billions more as we enter this new age of “preemptive” bank failures. 

Are we just setting ourselves up for another taxpayer funded bailout of the financial industry and Wall Street a year or two down the road if the market determines that these assets are not even worth the supposed “firesale” prices? 

The $32.9 billion in total assets Washington Mutual Inc. listed in its Chapter 11 bankruptcy filing could be much lower than originally disclosed because at least part of the assets are company stock that is now worth next to nothing.

While WaMu has not disclosed how much of its assets are tied up in company stock, it said in a recent regulatory filing that “it does not anticipate that there will be any recovery to the company for the common stock interest.”

The company listed debts of $8.2 billion in its bankruptcy filing.

If a large chunk of WaMu’s assets is tied up in its stock, the pool of money available to the company’s dozens of creditors is diminished, said Mark Northrup, a bankruptcy attorney and shareholder of Graham & Dunn in Seattle.

“It means that a substantial percentage of those assets may not be worth very much because they represent the holding company’s interest in a company that has essentially failed,” said Northrup.

This is the kind of evidence that will drive the “survivors” – like JPMorgan, Wells Fargo, Citigroup, Bank of America and the other “chosen” few – to demand more in the way of taxpayer dollars and guarantees before they comply with an invitation by the Feds to take over institutions under threat of insolvency and seizure.

Establishing a valid market value for the toxic assets is not the only threat to JPMorgan’s investment in WaMu, as well as the investment the American taxpayer is being asked to make in the entire financial system. Pending civil lawsuits, criminal investigations and endless bankruptcy proceedingsmay eat up a sizeable portion of the anticipated value of these and future acquisitions.

In the same filing with the Securities and Exchange Commission, Washington Mutual noted that is has about $5 billion in cash in deposit with its subsidiary bank and “is in the process of confirming the status of those deposits and other assets.”

If it is an asset of the holding company, the $5 billion would be used to pay creditors as part of the bankruptcy, Northrup said.

The holding company declined to comment.

JPMorgan Chase purchased Washington Mutual’s banking operations after the thrift was seized by the federal government on Thursday, and the holding company – along with the company’s stock – is now tied up in bankruptcy.

WaMu’s stock has since been delisted from the New York Stock Exchange and is now trading on the Pink Sheets, an over-the-counter listing of stocks.

On Wednesday, it was trading between 9 and 14 cents, with a volume of about 278 million shares. On Sept. 29, the day it was delisted from the NYSE, WaMu was trading at 16 cents. A year ago, it was trading for $35.69 a share.

As Washington Mutual’s bankruptcy progresses, one aspect under consideration for Seattle lawyers is where the drama will unfold.

WaMu filed its bankruptcy petition in Delaware. But if a majority of the bank’s dozens of creditors are located in the West, it’s possible there could be a push by local lawyers to move the bankruptcy to Seattle, said Northrup.

That’s an unusual and difficult move to make and has only happened once in recent memory, he said.

In the mid-1990s, the national chain of home improvement stores Ernst Home & Nursery, based in Seattle, filed for bankruptcy in Delaware, and local lawyers successfully moved the filing to Seattle because a majority of the company’s creditors were located in the Pacific Northwest.

Whether lawyers push for a move to any other city will depend on where the majority of creditors are located, and a full list has not yet been disclosed.

“There would have to be a really heavy concentration in a different location,” said Northrup. 

Washington Mutual has 67 branches in Oregon.

And what of the billions of dollars worth of MBS the government is itching to buy off these lenders in the bailout boondoggle? Are we, the taxpayers, going to get a “sweetheart” deal, or are we going to end up in a trillion dollar whole for generations to come? 

Who’s sideis Paulson, Bernenke and the rest of the “civil servants” really on in all of this? The taxpayer or Goldman Sachs and Wall Street? 

These developments at WaMu should be taken into consideration in the crafting of this bailout. This rush to pass vague and ill-thought legislation will certainly be viewed as a major blunder in hind-sight, but they still have a chance to fix it today in the House of Representatives – but don’t count on it. 

We need to take some more time to fully investigate the whole of the problem, with all variables in the analysis, and not let the Bush Cartel bum-rush us into what will most likely be the first in a series of failed bailouts ultimately costing taxpayers trillions.