Washington Mutual’s Bankruptcy Limps Along
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Washington Mutual’s Bankruptcy Limps Along

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November 1, 2011

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Washington Mutual Inc. (WaMu), which sought bankruptcy protection way back in September 2008, may be nearing the end of its contentious $7 billion bankruptcy filing.

The defunct bank, however, still has a few major hurdles left to overcome. First, last month, a bankruptcy judge refused to accept WaMu’s proposed Chapter 11 settlement plan, which would have been worth roughly $7 billion.

Instead, to the frustration of WaMu’s multiple creditors, who have been looking to be repaid for more than three years since regulators seized the dying bank, the bankruptcy judge sent the case to a mediator.

Now, a mediator is attempting to settle a conflict that started at the apex of the recession in 2008. According to the Wall Street Journal, WaMu’s failure represented the largest bank failure in the history of the United States.

At the time of its unfortunate demise, the bank was the sixth-largest money depository and credit card issuer in the country. Shockingly, when it was filing bankruptcy, WaMu admitted to having more than $7 billion worth of liabilities, which was balanced by only $4 billion in assets.

And, this week, another obstacle was placed in WaMu’s bankruptcy path. According to sources, people who bought mortgage-backed securities from WaMu and its subsidiaries have filed a class action lawsuit against the bank.

Recently, a federal judge in Seattle allowed the class action lawsuit to proceed. The purchasers of at least 13 different types of mortgage-backed securities are seeking compensation from WaMu’s non-banking subsidiaries, as well as former officers and directors of the beleaguered bank.

If the plaintiffs win their suit, they may not be able to immediately obtain relief, as they will have to wait in line with the rest of the bank’s creditors, most of whom have been demanding compensation for several years.

These separate incidents—the class action lawsuit and bankruptcy mediation—show the complex legal issues that arise when major banks go bankruptcy.

Because of the complex nature of the creditor’s claims, and the difficulty of getting all the separate parties to agree on a single plan, WaMu’s bankruptcy drama will likely continue for a while.

Nevertheless, recent events indicate that the bankruptcy court would like to resolve the matter soon.


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