) --

Washington Mutual


's three and a half year-old bankruptcy case drew toward a close on Friday, though issues it raised will linger for some time.

U.S. Bankruptcy Court Judge Mary Walrath approved the plan, which various stakeholders must vote to accept or reject before a March 7 deadline.

Washington Mutual was seized by regulators Sept. 25, 2008, with the bulk of its banking operations being sold to

JPMorgan Chase

(JPM) - Get Report


The holding company, however, went into Chapter 11, making it the largest bank failure in history and the second-largest bankruptcy after

Lehman Brothers


Nonetheless, while the public may have forgotten about WaMu, its resolution, such as it was, is likely to continue to impact the financial services industry for years to come. Here are four big questions that remain unresolved following WaMu's bankruptcy.

1. Winding down big banks looks messier than ever.

Think WaMu's three and a half year bankruptcy fight was a mess? At least the parts of WaMu that went into bankruptcy are close to being settled.

Still unresolved, however, is roughly $6 billion in liabilities that are in a kind of no man's land. Owners of those liabilities (mostly unsecured bonds) could not seek repayment either from JPMorgan or through the Chapter 11 process.

Pointing to this unresolved $6 billion, John Douglas, a partner at Davis Polk and former FDIC general counsel, describes WaMu's unwinding as "a long-running disaster."

"It makes you wonder how orderly liquidation is supposed to work in the context of a complicated institution, because Washington Mutual just wasn't that complicated," he says. "It's basically a retail bank highly concentrated in mortgage loans."

Douglas says it is up to the FDIC to determine "whether and when its going to distribute any money" to holders of the unresolved $6 billion in WaMu obligations, but the regulator has been silent on the issue.

The owners of these obligations could not be identified. Douglas says they originally were mostly large institutions, including

Morgan Stanley

(MS) - Get Report


The Bank of Ireland


, and HBOS, now part of

Lloyd's Banking Group

, though many of the liabilities have since been bought by hedge funds.

FDIC spokesmen did not respond to an email message sent to them on Saturday asking about the unresolved $6 billion.

Part of the FDIC's reason for not yet distributing any of the funds may be that it doesn't know when it is safe to do so, since claims may still be made on it. For example,

Deutsche Bank

has made a $10 billion claim against Washington Mutual, arguing mortgages WaMu underwrote and sold to the German bank were fraudulent and must be repurchased.

Attorneys for the FDIC and JPMorgan have been arguing over which institution would have to pay Deutsche Bank if it proves itsclaim.

"The FDIC is sort of paralyzed, and because it's paralyzed nothing has happened," with regard to the outstanding $6 billion in WaMu obligations, according to Douglas.

Meanwhile, owners of those obligations "have no forum to complain about what the FDIC does or doesn't do. It's all really behind the curtain," Douglas says, adding that "the FDIC is not obligated to make anything public."

The "behind the curtain" status of these obligations would be troubling enough as it is, but what is even more troubling to Douglas is he expects the resolution of the next big bank failure to be even less transparent.

That's because what Title II of the 2010 Dodd Frank Act "is supposed to do," according to Douglas, is allow the FDIC to take control of the holding company and do the same thing at the holding company that it has done (or, in this instance, apparently not done) at the bank level.

"There would be no bankruptcy proceeding. Creditors would have no rights to fuss and fight about what the FDIC's doing. There'd be no judge to oversee anything," he says.

The purpose of Title II, according to Douglas, is to allow systemically important financial institutions to be wound down with a minimum of hassle and enable the regulators to do what is in the best interest of preserving the safety and soundness of the banking system.

In the case of WaMu, however, creditors have been shut out, Douglas says. While he sees major flaws with Title II, he believes those flaws are "mainly of academic interest" because banks, regulators and legislators are mainly concerned at this point with more pressing issues in the Dodd Frank legislation, such as the Volcker Rule, the swaps market, or the Durbin Amendment.

In other words, there's no point in figuring out how big banks will really be wound down until it's too late.

"My colleagues kind of laugh at me, but my theory is that we'll do a Title II resolution once and the Congress will go back and try to figure something else out," Douglas says.

2. Public still plenty suspicious of federal government and big banks


The decision by regulators to seize Washington Mutual and sell its branch network, loans and deposits to JPMorgan was highly controversial. Many shareholders were taken off guard, including retail shareholders and sophisticated ones such as buyout firm

Texas Pacific Group

, which lost its entire $1.35 billion investment.

In a blog post shortly after the WaMu seizure, Australian blogger/hedge fund manager John Hempton called the move

"the most capricious government action of this cycle and possibly the worst thing that has happened to American Capitalism this cycle."

Hempton, who sold WaMu owned preferred shares prior to the bank´s seizure but sold them at a loss, said in a follow-up email on Monday that he still holds that view.

"There was a lot of surprise," says Davis Polk´s Douglas. "There were a lot of institutional investors, including TPG and others who thought the seizure was premature and unnecessary and if the FDIC had been a little more patient it could have been recapitalized without destroying billions of dollars of wealth."

A TPG spokesman declined to comment.

Despite the controversy, Douglas says he understood the move from the FDIC´s point of view.

"The FDIC I think recognized that if you put Washington Mutual in a liquidation--if you did to Washington Mutual what you did to


--the losses would just be staggering and overwhelming, and the best way to handle Washington Mutual would be to take it early and do it in a way to where the FDIC insurance fund wouldn´t suffer any losses. And that´s what they did. The FDIC didn´t lose a penny on the failure, but they shifted that loss to the bank bondholders and the equity holders," Douglas says.

Retail investors who owned WaMu shares appeared to show far less understanding. Conspiracy theories were abundant among WaMu shareholders for a time, and when I covered the bankruptcy case in late 2009 and early 2010, reader comments on my articles and on message boards often assumed a political cast reminiscent of the Tea Party or Occupy Wall Street. For example, one person posting to a message board asks

"is this the WaMu board or tea party social" (sic)

However, none of that outrage was evident in an interview last week with equity committee chairman Michael Willingham, or Edgar Sargent, an attorney at Susman Godfrey who represented the committee.

They laughed when I asked if they were Tea Party sympathizers, or if they believed there was a strong anti-government sentiment in the WaMu shareholder group.

"I've never actually thought of that concept before," Willingham said. Sargent pointed out that 85% of equity holders approved the bankruptcy plan.

According to Kevin Starke, analyst at CRT Capital Group, WaMu and its creditors gave up on challenging the government´s decision to seize WaMu in exchange for a "global settlement" reached between various parties to the case.

"When the judge said

in a January 7, 2011 opinion the settlement was fair and reasonable, equity holders could no longer challenge it," Starke wrote via email.

Even so, it is hard to understand where all the outrage over WaMu´s seizure went.

Puget Sound Business Journal

reporter Kirsten Grind became a Pulitzer Prize finalist as a result of

" questions she raised in reporting

about the action. Those questions haven´t been answered. They have merely faded into the background along with countless others related to government actions during the crisis and will be left for historians to sort through.

3. Senior creditors no longer have all the power in a bankruptcy

The WaMu case has also demonstrated to senior creditors that they cannot ignore claims of more junior stakeholders as completely as they have traditionally done.

While WaMu shareholders may only have recovered two cents per share worth of value for themselves, the fact that they recovered anything at all is a testament to their persistence and willingness to challenge the conventions of corporate bankruptcies.

For example, senior creditors with $7 billion worth of claims on WaMu were arguing on the one hand that the company had tens of billions of dollars in claims against JPMorgan and the FDIC while at the same time saying there would not be enough money left over for it to make sense WaMu shareholders to be allowed to form a committee to make sure their voice was heard in the bankruptcy process.

Judge Walrath effectively told the creditors they couldn't have it both ways, a position that gave equity holders a seat at the table in negotiations. In so doing, they likely set a precedent for future bankruptcy fights, according to CRT analyst Starke.

4.Insider trading definition may now be broader.

One of the big victories for equity holders came when they accused senior creditors of insider trading, based on the fact that their standing as creditors made them privy to non-public material information that enabled them to profit from certain trades in WaMu securities.

The information in question--involving the market price for some highly illiquid securities--was disclosed to the public by WaMu in its monthly operating reports, but Judge Walrath ruled that those reports may have been insufficient. The judge was ready to let the equity committee litigate to try to prove this point in order to make the case that the senior creditors--four large hedge funds--had therefore committed insider trading.

While the case had some "very fact-specific elements," and the judge´s opinion may ultimately be vacated as part of a pending settlement, it nonetheless "has caused people to sit up and take notice and examine their compliance procedures to ensure they´re up to snuff and to change them if and where necessary to take into account this judge´s view and the possibility of other judges adopting the same view," says Jamie Sprayregen, partner at Kirkland & Ellis and one of the nation´s most prominent restructuring attorneys.


Written by Dan Freed in New York


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