WILMINGTON, Del. — Washington Mutual Inc., JPMorgan Chase & Co. and federal regulators said Friday they have settled disputes arising out of the largest banking collapse in U.S. history, that of Washington Mutual Bank, or WaMu.
Brian Rosen, attorney for WaMu's former parent, announced the deal at a hearing in the U.S. Bankruptcy Court in Wilmington, Del. He's with Weil Gotshal & Manges.
The settlement will bring about $6.2 billion into the Chapter 11 case of WaMu's former parent, Washington Mutual. But it could mean even more value for JPMorgan, which bought WaMu in a deal brokered by regulators.
Creditors of WaMu itself will get only about $1.5 billion out of the settlement, in the form of a share of tax refunds that will be handed over to the Federal Deposit Insurance Corp.
Attorney Evan Flaschen of Bracewell and Giuliani, who represents another group of WaMu bondholders, expressed displeasure with the settlement.
"We are very disappointed that the FDIC has chosen to reach a settlement in its own interests rather than fulfill the fiduciary duties it owes to the noteholders and other creditors of the WaMu Bank receivership," Flaschen said. "The WaMu noteholder group does not support the settlement and we are reviewing our options as to how best to defeat it."
The FDIC is trying to gather money to pay those hurt when WaMu went under, including bondholders owed $13 billion.
Terms of the settlement call for JPMorgan to relinquish some $4 billion that was in parent company Washington Mutual's bank accounts at WaMu when WaMu was seized and sold.
In return, JPMorgan gets a $2.1 billion share of tax refunds, other assets worth billions of dollars, and a shield from allegations of impropriety that have dogged it over the 2008 purchase of the ailing thrift.
JPMorgan has been clinging to the bank-account cash while battling allegations it engineered WaMu's collapse in order to take it over at a bargain price.
The deal announced Friday takes JPMorgan largely off the hook in a series of lawsuits, as Washington Mutual, JPMorgan and regulators agreed to drop legal actions they have filed against each other.
The settlement involves tax refunds that will arrive once the thrift's losses are counted against previous years of profits.
Rosen said JPMorgan will get 70% of what is expected to be an initial $3 billion tax refund. Washington Mutual Inc., WaMu's former parent, will get the remaining 30%.
A second tax refund, which could total as much as $2.6 billion, will be divided between parent company Washington Mutual and the FDIC. The FDIC will get 59.6% of the second tax refund and Washington Mutual will get the rest.
The FDIC is in charge of finding money for WaMu's creditors in a receivership proceeding that is separate from the bankruptcy case of parent company Washington Mutual.
Not all of WaMu's creditors trust the agency's handling of the thrift's debts, because the FDIC brokered the sale of WaMu to JPMorgan. The agency could be tagged for damages, including demands for indemnification by JPMorgan as well as claims based on its own alleged fumbling of the sale.
Built into Friday's settlement is an agreement that JPMorgan will cap its indemnification demands against the FDIC at $1.4 billion. In return, JPMorgan will get a first priority claim against the receivership, Rosen said.
FDIC spokesman David Barr refused to comment Friday on the settlement, or the indemnification arrangement. It appears to put JPMorgan at the front of the line of WaMu's creditors in the receivership, if lawsuits over the deal continue to slam JPMorgan.
A group of institutional investors in WaMu have taken aim directly at JPMorgan's pursuit of WaMu in a case that began in Texas. The suit was later moved to Washington, D.C., where a judge is weighing JPMorgan's request to dismiss the case.
Rosen said the three-way settlement will be incorporated in a Chapter 11 plan for Washington Mutual, which will be filed by March 26.
If bondholders who backed WaMu don't go along with the deal, and continue to press their claims for payment in the parent company bankruptcy, the settlement is off, Rosen said.
WaMu bondholder attorney Philip Anker of Wilmer Cutler Pickering Hale & Dorr was in court Friday, but said he couldn't talk about the case.
Two groups of WaMu bondholders have filed claims in the parent company's bankruptcy case, as has the FDIC, acting as receiver for WaMu's creditors. They say WaMu paid years of dividends to Washington Mutual, only to be abandoned by the parent company at the height of anxiety about the steadiness of the U.S. financial system.
In addition to a share of one of Washington Mutual's tax refunds, the settlement gives JPMorgan two other hotly contested assets: pension-plan assets with an estimated value of $2 billion and trust preferred securities.
JPMorgan also gets Washington Mutual's intellectual property and its stake in Visa Inc., although it must pay $50 million for the Visa interests.
Washington Mutual's parent gets $55 million cash from the settlement of an old lawsuit, cash that is in the custody of the Delaware bankruptcy court.
JPMorgan gets to keep $172 million of what is in Washington Mutual's bank accounts, but has agreed to pay Washington Mutual $179 million to settle intercompany loans.
Shareholders of Washington Mutual have been hoping for a recovery out of the bankruptcy case. The company has said there is no chance for common shareholders, because it must cover debts of at least $8 billion before shareholders get anything.
Washington Mutual's stock was trading for less than 20 cents a share Friday, after the settlement was announced, a slide of more than 50% off a brief peak of 55 cents a share earlier this month.
While other investors have been hoping for fast payment through a settlement, rather than years of uncertainty due to court fights, many shareholders have feared a settlement would be struck at a level that puts them out of the money.