Court shuts investment firms out of FDIC lawsuit

The firms, which held investments at the failed bank, butted into an existing lawsuit between federal regulators and financial institutions seeking repayment for lost values of mortgage-backed securities when Washington Mutual went under.

The group of firms grew concerned that the Federal Deposit Insurance Company’s (FDIC) conservatorship funds meant to reimburse investors would go to the larger banks currently suing the government – most notably, Deutsche Bank National Trust – and “exhaust the funds in the estate,” according to court documents.

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The District of Columbia Court of Appeals agreed with a previous ruling that found the hedge fund and investment firms had no legal standing to intervene and their economic interests did not face "imminent, threatened invasion," it said.

“Given the implications of appellants’ argument, they are swimming up river,” wrote Senior Judge Laurence H. Silberman in the decision.

“If we were authorized to dispense with the standing requirement for a defendant-intervenor, then any organization or individual with only a philosophic identification with a defendant – or a concern with a possible unfavorable precedent – could attempt to intervene and influence the course of litigation,” he said.

In September 2008, the Treasury seized Washington Mutual Bank and handed over the supervisory reins to the FDIC. Soon after, Wall Street giant JP Morgan Chase agreed to take on the flailing entity’s assets, including subsidiaries, and some of its liabilities – with the FDIC agreeing to cover any losses left over.

The next day, the bank’s parent company Washington Mutual, Inc., filed for Chapter 11 bankruptcy.

The federal regulator has endured a handful of lawsuits, the largest of which from Deutsche Bank – which sought $6 billion to $10 billion in “damages” caused by the Washington Mutual’s bankruptcy filings.

The FDIC, however, only has $2.8 billion in its receivership coffers to pay out, according to federal documents. Deutsche Bank has since modified its suit to include JP Morgan Chase as a target.

And that’s where Anchorage Capital Group, Marathon Credit Opportunity Master Fund, Silver Point Capital, Venor Capital Management and the other firms that intervened in the 2012 case, come into play.

“They fear that the FDIC, perhaps in order to protect the assets of the FDIC’s corporate entity from an adverse judgment, will settle with JP Morgan at too low a figure,” Judge Silberman wrote. “In other words the FDIC, unlike a typical receiver, has skin in the game. … As we deduce their objective, appellants wish to intervene to be able to block such a settlement – perhaps to have negotiating leverage.”

“And the difficulty with that claim – besides ignoring the FDIC’s statutory obligation to represent creditors fairly – is that it is hopelessly conjectural,” he said.

Before its collapse in 2008, Washington Mutual Bank was the sixth largest in the United States.