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Shares of Washington Mutual Inc fell 60 percent after a court-appointed examiner extinguished hopes that stockholders would recover anything in the two-year-old Chapter 11 bankruptcy filing.
The examiner's report, issued late Monday, backed the company's finding that there is no money to pay shareholders anything.
The report was seen as generally positive for bondholders, who gain some certainty that the company will exit bankruptcy and repay them in the coming months.
Washington Mutual filed for bankruptcy in September 2008 after its lending operation was seized by regulators in the biggest bank failure in U.S. history. Shareholders have accused regulators of jumping the gun.
After the seizure, the bank was sold immediately to JPMorgan Chase & Co. for $1.9 billion US.
The bankruptcy wiped out individual investors who held the common stock.
Shareholders won a victory earlier this year when a U.S. Bankruptcy Court judge in Delaware appointed an examiner to investigate their claims.
But the examiner, in his report, determined there was likely little to be gained from tearing up a settlement among Washington Mutual, the Federal Deposit Insurance Corp and JPMorgan.
The three parties agreed to drop competing legal claims and to divide billions of dollars of disputed cash and tax refunds.
Most creditors will be paid in full under the company's proposed reorganization.
“The bulk of the holding company bankruptcy case is coming into focus in terms of outcomes,” said Kevin Starke, an analyst with CRT Capital Group in Stamford, Connecticut.
The examiner's report was good news for noteholders who are first in line to be paid, Starke said. The company can emerge from bankruptcy as soon as the end of the year, he added.
“I think it was a little shocking but I don't think this is done yet,” said Larry Amboy, a shareholder based in California. The examiner “didn't really uncover the stones we all know are out there,” he said.
Starke said Washington Mutual's trust preferred securities, also known as the REIT series securities, fell by half after the examiner's report came out.
Washington Mutual issued $4 billion of those securities and holders have argued that the company improperly converted them to essentially worthless preferred stock when the bank was seized.
Those investors and Washington Mutual are preparing for a December trial on the issue, which could potentially impact the company's plans to emerge from bankruptcy.
The examiner's report revealed confusion among the participants who arranged the conversion. Starke said the holders of the securities were hoping for more from the report.
The case is In re Washington Mutual Inc, U.S. Bankruptcy Court, District of Delaware, No. 08-12229.