By Dan Fitzpatrick
Hedge-fund firm Paulson & Co. sold its Washington Mutual Inc. bank bonds last week following a lawsuit seeking billions of dollars from the thrift's 2008 failure, according to people familiar with the move.
The giant hedge fund run by billionaire John Paulson exited after J.P. Morgan Chase & Co., which bought the banking operations of Washington Mutual, filed the suit last week against the Federal Deposit Insurance Corp.
Paulson was among the debtholders vying with J.P. Morgan over $2.7 billion housed in an FDIC receivership that liquidated Washington Mutual more than five years ago.
As a group, the bondholders held roughly $6 billion in senior debt, although Paulson wasn't one of the largest holders, said one of the people familiar with the move.
It isn't known exactly why Paulson opted out of the group last week or exactly how much of the debt it had. The departure represents the latest shift for Mr. Paulson, an investor whose moves have been closely watched since he bet correctly against the housing market in the late 2000s. Since then, Paulson & Co., had seen its assets under management increase to $36 billion, though that amount has fallen in recent months to about $18 billion, according to the firm's website.
As creditors, the bondholders believe the FDIC receivership money is theirs and that J.P. Morgan agreed as part of its purchase to assume all of Washington Mutual's liabilities. But J.P. Morgan also wants a portion of the $2.7 billion to pay for lawsuits, settlements and tax claims resulting from mistakes made by Washington Mutual. Its lawsuit, filed last week in federal court in Washington, D.C., states that the FDIC receivership has an obligation to absorb those liabilities. The FDIC, which declined to comment, has said J.P. Morgan inherited those problems with the 2008 sale.
J.P. Morgan declined to comment. No information was available on the buyers or details of the sale. Many firms buy distressed debt.
The fall of Washington Mutual was the biggest commercial-banking failure in U.S. history. It presented immediate benefits to J.P. Morgan, expanding its consumer reach across the U.S. for the first time.
But holders of Washington Mutual senior and subordinated debt were marooned, setting off a five-year battle for the remains of Washington Mutual's parent company. The receivership includes the $1.88 billion that J.P. Morgan paid for Washington Mutual's branches and deposits.
A group of bondholders that included Monarch Alternative Capital LP and Venor Capital Management LP tried in 2012 to intervene in a separate, private lawsuit. J.P. Morgan and the FDIC are both defendants in that case, and they have disagreed in court documents over who was ultimately liable for any Washington Mutual problems.
The bondholders argued that if the case went against the FDIC, it would impair the debtholders' ability to recover any funds from the receivership. But a judge denied the intervention attempt. It isn't known if Monarch and Venor are still Washington Mutual debtholders. Both firms didn't respond to emails seeking comment.
A complete list of senior bondholders hasn't been disclosed. J.P. Morgan in its suit described the group as "hedge funds and similar entities" that bought Washington Mutual bank debt for "pennies on the dollar."
It is currently composed of more than 10 institutions, according to one person familiar with the group.
The remaining members are weighing options in the wake of the J.P. Morgan lawsuit, including whether to intervene in the new case, said the person close to the group. It has also not ruled out a settlement.
The holders are seeking to recover about 45% of the $6 billion in claims they have against the FDIC receivership.
Bondholders, the FDIC and J.P. Morgan held settlement discussions before J.P. Morgan filed its lawsuit but were unable to reach a compromise, said people familiar with the talks. After J.P. Morgan filed its suit, the value of the Washington Mutual bonds fell to 27.5 to 28.25 cents on the dollars compared WITH 28.25 to 29.5 cents on the dollar before the filing, according to Kevin Starke of CRT Capital Group LLC, a research firm.
Write to Dan Fitzpatrick at email@example.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires