On Sunday, the Reuters reported that the federal regulator, the Federal Deposit Insurance Corp. (FDIC) has taken back its support in the bankrupt company, Washington Mutual Inc.’s (WaMu) 18-month long case with JPMorgan Chase & Co. (JPM) and FDIC, whereby accordingly to a resolution reached recently, JPM was supposed to obtain a $1.4 billion tax benefit following its 2008 acquisition of WaMu’s banking subsidiary.
The matter caught fire when WaMu’s bank was taken over by JPMorgan. While WaMu wanted to seek for the $4 billion cash deposit to repay its creditors worth $7 billion, FDIC argued that it should take temporary custody of the cash because of losses caused by the failure of WaMu’s bank. On the other hand, JPMorgan alleged that it should have a right to the cash as it had bought the failed bank.
On Mar 12, FDIC, JPM and WaMu came to a resolution whereby WaMu will receive the $4 billion of cash deposit that was held by JPM when it bought Washington Mutual Bank for $1.9 billion in Sep 2008 after it was shuttered by FDIC. The three entities will also share two tax refunds expected to be worth about $5.6 billion. In addition to turning over the $4 billion in deposits, JPM has agreed to purchase Visa Inc. (V) shares from WaMu for $50 million.
Accordingly, JPM seeks 70% of the tax refunds worth $3 billion, expected from WaMu’s prior operating losses. WaMu is expected to obtain about 40% of the tax refunds worth about $2.6 billion resulting from a second round of operating losses, with the remaining 60% apportioned to the FDIC.
However, when the settlement was to be filed on Mar 26, FDIC reversed its consent after JPM announced its share of $1.4 billion in the tax refunds discussed above. According to FDIC’s stand, the U.S. law prohibits tax refunds to the companies that were bailed out by the government during the extreme financial crisis. This includes JPM and bars the receipt of such tax refund.
The proposed settlement among JPM, the FDIC and WaMu would also end their various legal fights over claims to disputed bank deposits. The agreement was to be finalized while the terms were to be executed and included in the Chapter 11 reorganization plan that was filed by WaMu with the Delaware bankruptcy court on Mar 26. Consequently, a hearing has been requested for approval of the disclosure statement May 19 with a confirmation plan expected by Jul 20.
We believe that JPM could be hit hard with the outcome of the legal dispute since it is already significantly exposed to risks and uncertainties associated with the integration of its acquisitions. Given the continued market volatility and uncertainty, the company may need to take additional markdowns and provide for allowances for loan losses on the assets and loans acquired from the Bear Stearns merger and from the acquisition of WaMu’s banking operations.
Read the full analyst report on “JPM”
Read the full analyst report on “FDIC”
Read the full analyst report on “V”
Read the full analyst report on “WAMU”
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