It forgot $4.4 billion.
FDIC is currently fighting with WaMu (Washington Mutual Inc.) and bondholders to access the money, a deposit in WaMu Inc’s Washington Mutual Bank FSB subsidiary, from JP Morgan. The oversight has led to something of an unintended consequence, as noted by Bank of America analyst Jeffrey Rosenberg:
The FDIC supported purchase and assumption of Washington Mutual by JPMorgan led to an unexpected outcome as bank level debt prices fell much further than holding company bond prices due to $4.4bn in cash left at the holding company, providing significant support for those bonds valuations.
The fight over that cash accelerated today as a group of bank debt holders filed their objections and the FDIC filed a limited objection to the motion seeking approval by the hold co to transfer all of the funds. The case has broader significance for future FDIC actions and financial issuance and for the applicability of banking ‘Source of Strength’ doctrine to Thrifts.
That doctrine being that bank holding companies guarantee they’ll be available as a “source of strength” to their subsidiaries. In otherwords, if subsidiary banks get in trouble the holding company has to sort them out — instead of passing the problem on to the government. Hmmmm.
Related links
The return of ‘good bank-bad bank’ - WSJ
Fed’s uncertain power over banking companies - New York Times
