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WaMu may see life after bankruptcy, thanks to taxes

By Tom Hals

WILMINGTON, Delaware (Reuters) - Washington Mutual Inc <WAMUQ.PK>, the biggest bank failure in history, may have a second life after bankruptcy.

That is almost unheard of -- the majority of bankrupt financial companies liquidate -- and is largely a result of the tax advantages of staying in business.

What's more, tax refunds that are due Washington Mutual -- about $5.6 billion -- are its biggest asset.

Those tax refunds are to be shared by the Federal Deposit Insurance Corp, JPMorgan Chase & Co <JPM.N> and Washington Mutual under an agreement announced earlier this month.

On Friday, Washington Mutual filed a reorganization plan to implement the agreement, even though the FDIC has yet to sign on.

Still, there are indications that Washington Mutual will be able to emerge as a stand-alone company, and a number of investors are betting on it.

Washington Mutual's plan to exit bankruptcy includes a rights offering to raise an undetermined amount of money to support the company, which would reorganize around an investment subsidiary and a mortgage reinsurer.

Even after it receives the tax refunds, Washington Mutual will have unused operating losses it can apply to future earnings.

The plan to sell shares is being backstopped by funds managed by Appaloosa, Centerbridge, Owl Creek and Aurelius.

"The smart money is saying there's money here going forward not just looking back," said Kevin Starke, senior vice president of CRT Capital Group in Stamford, Connecticut.

It is the money looking back that may be in contention.

Starke said it was somewhat surprising the FDIC did not support the plan of reorganization, but he said he expected Washington Mutual to win its backing.

The FDIC said in a statement it "is working with all parties involved to reach agreement with respect to all terms of the proposed settlement."

JPMorgan continues to be engaged with the relevant parties, according to a spokesman.

The FDIC sold Washington Mutual's failed bank to JPMorgan for $1.9 billion after regulators seized it in September 2008, setting off a battle over various aspects of the sale agreement and the assets it covered.

There are other questions remaining as well.

The company's plan of reorganization lacks details on the rights offering. It does not say what it expects to raise from the share sale and does not give a value for the reorganized company or a comparative liquidation analysis.

And Washington Mutual still faces a challenge to its plan by holders of bonds issued by its bank. The company's lawyer, Brian Rosen of Weil, Gotshal & Manges, has said if their claims are allowed, the settlement agreement would be "vapor."

Washington Mutual has said those bondholders must bring their claims against the FDIC.

Washington Mutual shareholders are also likely to object to the plan of reorganization. They have said the company could have up to $20 billion in assets to distribute to creditors. The company said it was distributing closer to $7 billion.

Starke said JPMorgan ended up getting a great deal when it bought the seized lending operations, sweetened with the added money related to the tax break.

"They were getting it for free. Now they are getting it for free plus a mail-in rebate."

Washington Mutual might have looked to reorganize, Starke said, because it had businesses and investments that would be hard to unwind quickly and also because it had valuable operating losses it could use to shield against future taxes.

"I really think that aside from winding down assets, they may be thinking about using the shell and using the tax advantages to acquire other businesses," said Starke, who cited banking businesses as a possible target.

Shares of Washington Mutual closed at almost 16 cents on Monday.

Washington Mutual and JPMorgan did not immediately return calls for comment.

The case is In re Washington Mutual Inc, U.S. Bankruptcy Court, District of Delaware (Wilmington), No. 08-12229.œ

(Reporting by Tom Hals; Editing by Steve Orlofsky)

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