WaMu Seized, Sold to JP Morgan

123jump.com Staff
25 Sep, 2008
New York City

Washington Mutual, the battered bank was seized by the Federal regulators and sold all of its assets to JP Morgan. The WaMu failure is the largest bank failure in the U.S. history and the bank had $188 billion in deposits but had faced withdrawals of $16.7 billion in the last ten days.

[R]11:55PM New York – Washington Mutual, Inc was seized tonight and all its deposits and branch network were transferred to JP Morgan.[/R]

Washington Mutual Inc ((WM)) was seized this evening and its branch network and other assets were sold in a bidding process to JP Morgan Chase & Company. The notice on the Web site of FDIC read, “All former Washington Mutual Bank will reopen for normal business hours as branches of JPMorgan Chase Bank.”

Only three weeks ago, the bank had forced out its chief executive Kerry Killinger after eighteen years at the helm, and appointed Alan H. Fishman as its leader.

In a regular trading in New York today, Washington Mutual stock fell 25% to $1.69 and led the decliners in S&P 500 index with triple the average daily volume of 349 million shares.

Misplaced TPG Confidence

The Texas Pacific Group, a private equity company had invested $2 billion in the troubled thrift in April of this year in the offering that raised $7.2 billion. The lender had then lower its quarterly dividend to 1 cent per share and appointed David Bonderman the founder and chief of the TPG on its board.

The bank had also appointed Larry Kellner, chairman and chief executive officer of Continental Airlines and former executive vice president and chief financial officer of American Savings Bank, to become a board observer at TPG’s request.

At the time of the investment the company was worth $9 billion. Since then the company’s stock has fallen to $1.69 from $12.47. The deal with JP Morgan is expected to wipe out existing shareholders.

This is the second time that the government has reached out to JP Morgan for a sale of financial institution and in earlier transaction in March Bear Stearns was sold at a fire sale price.

OTS Action

The Office of Thrift Supervision said, “Pressure on WaMu intensified in the last three months as market conditions worsened. An outflow of deposits began on September 15, 2008, totaling $16.7 billion. With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business”

The bank was put in a receivership and appointed the Federal Deposit Insurance Corporation as the receiver which sold WaMu in an auction to JP Morgan. It is not clear how many organizations participated in the bidding process.

WaMu became an OTS-regulated institution on December 27, 1988 and grew through acquisitions between 1996 and 2002 to become the largest savings association supervised by the agency. As of June 30, 2008, WaMu had more than 43,000 employees, more than 2,200 branch offices in 15 states and $188.3 billion in deposits.

Quarterly Losses

The thrift lost $6.1 billion in three quarters in a row after its mortgage portfolio suffered heavy losses as housing market deteriorated in the last six quarters.

The bank had reported second quarter loss of $3.33 billion after it increased its loan loss reserve to $8.46 billion from $3.74 billion and said that it has liquidity of $40 billion.

WaMu in the first week in April of this year announced loss of $1.1 billion or $1.40 per share in the first quarter and provision of $3.5 billion and first quarter charge-offs of $1.4 billion. WaMu lost $1.8 billion or $2.19 per share in the quarter ended in December of 2007. The savings and loan bank had $39 billion in loans and $303 billion in long term loans at the end of the year.

As recently as September 11, the bank had reported liquidity of $50 billion and provisioned for loan loss of $4.5 billion and retail deposit balances of $143 billion, unchanged from the end of 2007.

FDIC Risk

So far in the year, The FDIC has been appointed as a receiver in thirteen banks seizures and many of these transactions have cost the insurance fund. IndyMac Bank seizure in Pasadena, California may have cost the insurance fund as much as $9 billion.

Though the details of the deal with JP Morgan were not released, analysts had worried that the deal could cost FDIC as much as $18 billion. It is not clear whether FDIC will take a hit in seizing WaMu. Also the fate of its troubled mortgage portfolio is also not clear.

The FDIC, the insurance fund has $45 billion that insures $1.3 trillion of deposits. The Office of Thrift Supervision, established in 1989 supervised 829 thrifts with $1.5 trillion in assets and Washington Mutual Bank assessment were 12.2% of 2008 budget of the regulatory agency.

WaMu was founded as the Washington National Building Loan and Investment Association on Sept 25, 1889 and listed the company on stock exchange on March 11, 1983 through $72 million public offering.