UPDATE 2-WaMu begins showdown over bankruptcy plan

* Judge takes securities dispute under advisement

* Hundreds have objected to plan to repay creditors

* Most objections come from shareholders
(Recasts with details from hearing)

By Tom Hals

WILMINGTON, Del., Dec 1 (BestGrowthStock) – Washington Mutual Inc
(WAMUQ.PK: ) squared off in court against hedge funds on
Wednesday in a $4 billion dispute that is one of the biggest
hurdles to approving the company’s plan to repay creditors.

Washington Mutual collapsed into bankruptcy in September
2008, the day after regulators seized its lending business
known as WaMu in the biggest bank failure in U.S. history.
WaMu was sold to JPMorgan Chase & Co (JPM.N: ) for $1.9 billion
immediately after it was seized.

Wednesday’s hearings focused on a securities dispute that
could be the biggest threat to Washington Mutual’s
reorganization plan.

The hedge funds are seeking a summary judgment finding that
billions of dollars of securities they own were never swapped
into nearly worthless preferred stock during the chaotic hours
as the bank was being seized and lawyers were rushing to
prepare bankruptcy documents.

Judge Mary Walrath of U.S. Bankruptcy Court in Delaware
said she would take the issue under advisement.

An attorney for the hedge funds, Robert Stark, said he
expected Walrath would rule on the matter in her opinion on the
reorganization plan. Hearings are scheduled through Friday.

If the judge decides the securities were not swapped, it
could present a potentially huge liability for JPMorgan, which
bought the bank that issued the securities.

Stark argued the preferred stock was never issued, so there
was nothing to exchange the securities into.

“It’s like turning horses to unicorns,” said Stark, of the
Brown Rudnick law firm.

The judge interrupted his presentation with sharp questions
disputing Stark’s reading of the documents, at one point saying
his argument “makes no sense.”

A JPMorgan attorney noted that the hedge funds, including
those associated with Black Horse Capital, Greywolf Capital
Partners, Guggenheim Partners and Lonestar Partners, bought the
securities after the bankruptcy for an average price of 4 cents
on the dollar.

“Their adversary complaint is a desperate attempt to create
hold-up value in the hope that the legitimate creditors of WMI
or JPMC (Washington Mutual or JPMorgan) will offer them a
ransom payment,” Washington Mutual said in court papers.

POWER OF YES

Washington Mutual has managed to settle most disputes
before coming to court with its reorganization plan, due in
part to about $2.8 billion in tax refunds stemming from a
government stimulus package.

The reorganization plan divides about $7 billion among
creditors by essentially liquidating the company’s cash and
other holdings. The company may reorganize around a small
mortgage reinsurer, about its only remaining operation, as a
way to preserve some valuable tax credits stemming from
billions of dollars of net operating losses.

It is a humbling end to a once blazing star of the
financial world.

Founded in Seattle in 1889, Washington Mutual was once the
largest U.S. savings and loan. It had more than 2,500 branches,
$300 billion in assets and $188 billion in deposits when it was
seized.

Former Chief Executive Officer Kerry Killinger, who stepped
down weeks before the bank’s collapse, led the company through
a string of acquisitions and pushed to expand riskier lending,
including what came to be known as subprime mortgages.

The housing crash turned the one-time stock market darling
known for its “power of yes” tag line into a favorite of
short-sellers. In the bank’s final two weeks in 2008,
depositors withdrew $16 billion.

The reorganization plan offers nothing to shareholders, who
have brought most of the hundreds of objections to it. They
have been a constant presence at court hearings.

In their eyes, regulators jumped the gun in seizing the
bank, and shareholders’ court filings have suggested JPMorgan
and regulators colluded to sell the bank at a fire sale price.

They painted a picture often at odds with findings of
congressional investigations that have described WaMu as an
institution that polluted the financial system with dodgy
loans. A court-appointed examiner also found little to back up
the shareholders’ claims.
(Reporting by Tom Hals)

UPDATE 2-WaMu begins showdown over bankruptcy plan