A judge Tuesday gave court-appointed investigator Joshua Hochberg until Nov. 1 to wrap up his probe of the proposed settlement of legal disputes arising out of the largest banking collapse in U.S. history, that of Washington Mutual Bank, or WaMu.
Judge Mary Walrath approved Hochberg's request for an additional three weeks to investigate everything from WaMu's financial condition at the time it was seized in 2008 to the intentions of JPMorgan Chase & Co., which bought the thrift.
All are under scrutiny as Hochberg evaluates a proposed settlement that forms the underpinning of the Chapter 11 plan of WaMu's former parent, Washington Mutual Inc.
JPMorgan, WaMu's new owner, and the Federal Deposit Insurance Corp., which brokered the sale of WaMu, are also parties to the settlement and are answering questions from Hochberg, court documents say.
"There's a lot of people who had their hands on these transactions," Hochberg's attorney, Henry Sewell of McKenna Long & Aldridge, said at a hearing Tuesday in the U.S. Bankruptcy Court in Wilmington, Del.
Interviews of JPMorgan executives, regulators and others will continue through September, Sewell said.
Walrath's decision to give Hochberg more time prompted Washington Mutual to push off until December its planned Chapter 11 confirmation hearing, said Brian Rosen of Weil Gotshal & Manges, attorney for WaMu's former parent.
Hochberg, an attorney with McKenna Long & Aldridge and former Department of Justice fraud investigator, has not yet reached conclusions about the settlement, according to a preliminary report filed in advance of Tuesday's hearing.
Hochberg's final report Nov. 1 will indicate whether Washington Mutual's proposed settlement of a variety of legal actions arising out of the loss of WaMu is a fair deal for creditors owed an estimated $8 billion.
Filed with the court, the preliminary report outlines the ongoing investigation of the roots of WaMu's collapse, and the aftermath, including an agreement as part of the settlement to split up tax refunds of more than $5 billion.
Tuesday, Walrath approved Washington Mutual's settlement with the Internal Revenue Service, which brings the $5 billion in tax refunds under the control of WaMu's former parent. The tax refunds are a major portion of the assets that will be divided up under the proposed Chapter 11 settlement.
Approval of the settlement with the IRS is not approval of Washington Mutual's agreement to split the tax refund money with JPMorgan and with the FDIC, which is serving as receiver for creditors of WaMu, the thrift.
Sewell said the preliminary report filed Tuesday was "intended to be an outline," not a comprehensive summary of everything Hochberg is investigating. The attorney said initial comments about the preliminary report expressed concern about the scope of Hochberg's investigation.
JPMorgan is answering questions about its role in WaMu's demise, as Hochberg looks into allegations "that [JPMorgan] misappropriated [Washington Mutual and WaMu] confidential information, learned from the FDIC that a seizure of [WaMu] was likely, and discouraged other bidders so as to acquire WMB's assets at an unreasonably low price," court documents say.
WaMu was sold to JPMorgan for $1.9 billion, months after Washington Mutual rebuffed an earlier offer from JPMorgan to buy the thrift for much more.
Besides the allegations against JPMorgan, Hochberg said, he is looking at defenses that WaMu's new owner might be able to use to shield itself from damage claims. If market conditions or the Office of Thrift Supervision are really to blame for bringing the thrift to its knees, JPMorgan could escape liability, the preliminary report said.
The FDIC will gain some cash from the settlement: a share of tax refunds. It will also get out from under the threat of lawsuits from Washington Mutual creditors if the settlement is approved. The FDIC is gathering cash in its role as receiver for creditors of WaMu, the failed thrift.
Critics of the WaMu sale have accused regulators of hurting WaMu's chances of survival by prematurely telling JPMorgan and others the thrift was a takeover candidate. Hochberg is looking into those allegations, as well as claims that the bidding process was rigged in JPMorgan's favor.
If Hochberg concludes the settlement is fair and the Chapter 11 plan is approved, Washington Mutual's top-ranking creditors will have $7 billion to share, meaning windfall profits for those who bought the debt for pennies on the dollar soon after the loss of WaMu sent its former parent into Chapter 11 bankruptcy.
Shareholders and holders of trust-preferred securities issued by WaMu's former parent oppose the settlement, claiming it's designed to compensate top-ranking creditors while covering up serious flaws with the handling of the ailing thrift.
Stuffed with risky home loans, WaMu was taken over in September 2008 by regulators who feared it was on the brink of collapse and a threat to the stability of the U.S. financial system. Hearings before a Senate panel, however, have revealed that not all regulators believed WaMu was in such bad shape that it needed to be seized.