WAMU preferred equity

needhelp1700

On Friday the “Piers” preferred stock of WAMU got creamed - down 70%.  Normally, I think buying equity in bankrupt companies is total amateur nonsense, but this drop confused me.  The rationale behind it was that the “Piers” was at the bottom of the ladder and that continuing legal expenses would eat up the remaining capital of WAMU so this class wouldn’t be paid.
What’s confusing me about this is that the delay is being caused by the common equity class (obviously below the Piers class) who seem to have some small but reasonable chance of getting paid.  I believe that (among many theories of the equity class) is that they can go to trial against the four hedge funds accused of insider trading, get a ruling that their trading was insider trading, and then get the bankruptcy judge to vacate their claims in bankruptcy.  All their claims would then be “equitably redistributed” down to the equity holders.  Presumably, they would make the entire Piers class whole prior to flowing to the common.  The judge seems to believe that these claims have some merit.
Meanwhile, the equity is trading at 0.07/share which in the world of bankrupt shares means the market has decided it is worthless and just idiots are buying it.  It seems to me that the whole world has decided the judge is wrong and that the claims of the shareholders will go nowhere.  I’m just not buying this - it really looks like there was some pretty blatant insider trading going on with these hedge funds and they really might lose if they go to trial.
Where am I wrong in this?  On Monday should I buy up the entire Piers class and become a player in the WAMU bankruptcy?

Londonrocks

not so much on where you’re wrong, but what you don’t understand…..

pacmandefense

Uh…earth to Frank…the company is bankrupt and has been for several years. The issue is not doing a CFA-style valuation of the company. It’s evaluating the really bizarre machinations in this bankruptcy.
If I “ignore the hedge funds” then do I ignore the really extensive claims they have in bankruptcy that are ahead of the preferred? Of course, the hedge funds also own some of the preferred.
Anyway, “insight into the books” of a bankrupt company at this stage of bankruptcy is much easier than you might imagine. There is no longer any goodwill, off-balance sheet arrangements, toxic securities held as assets, etc. WAMU has been reduced to a pile of distributable cash. Now the issue is who gets it.
There is nothing in the CFA curriculum about distressed securities or bankruptcy - almost like CFAI doesn’t want to acknowledge that it exists. However, bankruptcies and defaults are picking up and if we go into a deep recession (something I think is very likely), there will be lots of these. It would be worth your time to read up a bit.

leadcfa

The judge’s ruling in this case basically declares that standard practices which take place in all distressed debt trading firms is insider trader. I assume this decision will be overruled.

kmf229

Well, it’s been a while, but my understanding is that the firms were conducting standard distressed trading practices where CI agreements were in place with the law firms which had the confidential information. There’s only a handful of distressed trading firms and an even small amount of law firms handling these bankruptcies so it’s likelihood that they would cross paths is highly likely, which is confidentiality agreements are relied upon (again standard practice).
There’s also the question of duty. As a distressed investor they have no duty to the company as they are not an insider as generally defined, which can get complicated, but in some cases allows someone to actually use insider information to trade so long as they are not violating a duty to the organization. I’m not sure the defense the funds are using is “hey we’re not an insider therefore we can trade on inside information all we want,” but the judge’s ruling did classfy the funds as insiders subject to general insider trading provisions we’re all familiar with. This is the ruling that I think will be thrown out or overturned, because this essentially puts distressed debt holders as an insider which would dramatically hamper this business. Ideally, we want to facilitate this market or else the value of the distressed companies will be even less valuable.
That being said, I do think there is some changes that should be made in the grey opaque market of distressed debt trading. It seems that these guys are getting an advantage in the marketplace and their profitability seems to prove it.

Sunshine4ever

Shoot. Looks like I was too late. I should have bought all that stuff on Monday. Damn… Nothing worse than thinking about something too long.

Swanand

what is the next play? …..