WaMu Preferreds a Target for Smart Money

Washington Mutual preferred shares are attracting attention from sophisticated investors, who see the potential for significant upside if legal wrangling breaks their way.
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) --

Washington Mutual

preferred shares are attracting attention from sophisticated investors, who see the potential for significant upside if legal wrangling breaks their way.

Zachary Prensky, managing director and founder of Little Bear Investments, dialed in to listen to bankruptcy court proceedings regarding Washington Mutual Friday, and says he is eyeing an investment in the preferred shares. Kevin Starke, analyst at CRT Capital Markets, says other sophisticated investors he has spoken with (but who he declined to name) have been buying the preferred shares.


JPMorgan Chase

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acquired Washington Mutual from the Federal Deposit Insurance Corp. in September 2008, JPMorgan and WaMu's attorneys have been battling over $4 billion in deposits and billions more in other assets in a highly complex and contentious bankruptcy case.

A separate but related lawsuit, American National Insurance Co., et al. v FDIC, has been making its way through the courts in which plaintiffs' attorneys argue JPMorgan "engaged in sham negotiations," among other tactics, "to gain an unfair advantage in obtaining

Washington Mutual assets at a 'fire sale' price," according to a motion Washington Mutual's attorneys filed Monday in the bankruptcy case.

The motion sparked a flurry of news reports on the case, as it appeared to give

new legitimacy

to the lawsuit. Attorneys for Washington Mutual cited information that had come to light in the lawsuit, including an internal JPMorgan email describing a meeting between the bank's Chairman and CEO, Jamie Dimon, and

Banco Santander


Chairman Emilio Botin in June 2008 in which Botin "indicated that Santander was interesting in acquiring WaMu and asked Dimon why JPMorgan did not buy WaMu in March 2008," according to the motion.

Dimon responded that WaMu's potential losses were higher than estimates by Texas Pacific Group, its largest investor at the time. The email also stated that "

it is important to have an open dialogue with

Santander, as Santander would not pursue any...of these opportunities if JPMorgan were to do the same," according to the motion, which asked the judge to allow a thorough investigation of the circumstances surrounding the acquisition.

The proposed investigation would include interviews with all the major U.S. financial regulators, as well as executives at JPMorgan, Santander,

Goldman Sachs

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Moody's Investors Service

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Wells Fargo

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and others.

If the investigation proceeds, things could get interesting for preferred shareholders. Little Bear's Prensky believes the most widely-traded preferred issue, which trades under the ticker WAMPQ.PK, could be worth over $100 -- more than three times where it was quoted Friday afternoon. However, he says, "in order to get there, JPMorgan's got to be liable for something other than just

the disputed $4 billion in deposits and that's not clear at all to me yet."

Though both Prensky and Starke believe the chance of a recovery in WaMu's common shares is a longshot at best, trading has been active over the past year and the Internet has been abuzz all year with comments from angry and defiant WaMu shareholders who believe they were swindled by JPMorgan and the government. They have even set up at least one

Web site

devoted to tracking all the WaMu legal activity.

Volume in both preferred and common shares have been especially high in recent days as the U.S. Trustee handling the case this week surprised several observers by requesting a list of WaMu shareholders with an eye to setting up a committee. In court Friday, attorneys for Washington Mutual indicated they "reserve the right to argue against" setting up an equity committee "because they believe at the very least the common is out of the money and the preferreds are probably out of the money," Prensky says.

A call to Brian Rosen, one of the lead attorneys for Washington Mutual, was not returned Friday.


Written by Dan Freed in New York


Read More:

A Win for WaMu Shareholders

Is a WaMu-JPMorgan Settlement Possible?