NEW YORK (TheStreet) -- Washington Mutual Bank was closed by the Office of Thrift Supervision on Sept. 25, 2008, with all of its deposits and loans being sold by the OTS and the Federal Deposit Insurance Corp. to JPMorgan Chase (JPM) - Get Report. Nonetheless, at least two court battles wage on while the stock of its holding company, Washington Mutual Inc., continues to bounce around on the pink sheets. Daily trading volumes topped 30 million shares on several days in 2009, even coming close to 100 million on a few occasions. In an effort to better explain this strange phenomenon, TheStreet has decided to address the five questions that retail investors most likely find themselves asking about this complex but intriguing situation.
1. What is WAMUQ.PK?
It is the common stock of Washington Mutual Inc., the holding company of Washington Mutual Bank. Large companies like Washington Mutual often have lots of legal entities for tax avoidance and other purposes. The holding company is the umbrella under which all the entities fit. For banks specifically, this legal and corporate status can make it easier to raise capital with the trade-off being the entity is subject to considerable oversight by the Federal Reserve. During the depths of the financial crisis,
famously converted to traditional bank holding company structures, leaving behind their status as independent investment banks.
2. Why do the shares still trade?
Because whenever a company files for bankruptcy protection, as Washington Mutual did, it takes a certain amount of time and lawyering to determine what's left of the company and divvy it up. A judge has to sort out all the claims against the company and its assets, and decide who gets what, if anything. Groups making claims typically include lenders, bondholders, vendors and former employees. There are also almost always lawsuits to work through, as is the case with Washington Mutual.
3. Are the common shares worth anything?
Probably not. According to its latest monthly financial statement, filed in October, Washington Mutual has assets of $6.9 billion. About $8.3 billion worth of liabilities and $3.4 billion in preferred stock, or a total of $11.7 billion, must be paid off before the common shares see any recovery. In other words, there is a roughly $5 billion shortfall. The best bet for common shareholders would be for them to win pending litigation against JPMorgan. However, the likelihood of a decision in their favor, or a settlement north of $5 billion, seems small. Sophisticated investors interested in taking a gamble on Washington Mutual have been buying preferred shares,
putting them higher in the pecking order for compensation.
Still, the math is not as simple as it sounds. There are plenty of variables that could change these numbers significantly. The fact that the U.S. trustee handling the bankruptcy
recently has given hope to common shareholders, even though attorneys for Washington Mutual have said they believe the equity stands no chance of recovery.
4. I don't care about penny stocks of bankrupt companies, so why should I care about what happens to Washington Mutual at this point?
Like so many decisions made by government officials during this crisis, the resolution of Washington Mutual was anything but routine. JPMorgan was able to buy the nation's largest thrift for $1.9 billion, without taking on any of its debts. Several insurance companies that owned Washington Mutual bonds and shares subsequently sued JPMorgan, arguing the deal was unfair. The FDIC stepped into the middle of the case, taking over the role of defendant from JPMorgan and getting the jurisdiction moved from Texas state court to a federal court in Washington D.C. If the plaintiffs win the case, it could have implications for how bank failures are resolved in the future.
There is also the possibility that the litigation will produce detailed behind-the-scenes information about how the deal came together in the months preceding Washington Mutual's failure. This month, attorneys for Washington Mutual came up with some interesting documents, including an internal JPMorgan email describing conversations between CEO Jamie Dimon and another potential Washington Mutual suitor,
boss Emilio Botin. Washington Mutual's attorneys want permission to interview a broad group of people with knowledge of Washington Mutual's final months, including representatives from all major U.S. financial regulators and executives at Goldman Sachs,
, among others. Revelations from those interviews, if they come to pass, could be enlightening.
5. Should JPMorgan shareholders be concerned?
Analysts who follow JPMorgan do not appear to be paying much, if any, attention to the case. Kevin Starke, an analyst at CRT Capital, has been tracking the litigation closely, but his focus has mostly been on potential recoveries for Washington Mutual bondholders. Starke believes that JPMorgan common shareholders have little to worry about, as a settlement, which
, would probably involve too small a sum to be material to the company.
Written by Dan Freed in New York