U.S. Forces WaMu Sale As Bank Founders
Friday, September 26, 2008
Federal regulators last night seized the massive, troubled mortgage lender Washington Mutual in the largest bank failure in U.S. history, then immediately sold much of the company to J.P. Morgan Chase for $1.9 billion in a deal that will create the largest bank in the country.
The historic two-step was orchestrated by Sheila Bair, chairman of the Federal Deposit Insurance Corp., on terms that preserve Washington Mutual's deposits and avoid what could have been a huge drain on the insurance fund that protects deposits of up to $100,000.
The fall of Washington Mutual, which was the country's largest savings and loan, expands once again the vast, burned-over landscape of the financial industry. The federal government has seized mortgage financiers Fannie Mae and Freddie Mac and insurance giant American International Group. The five largest independent investment banks are closed or have changed their business model. Most of the largest mortgage companies are closed or have been sold. This is the first time, however, that a large bank funded mostly by deposits has failed during the current crisis.
The sale furthers the consolidation of the U.S. financial industry, which is increasingly dominated by a few colossal banks with more than $1 trillion in assets, offering a vast range of services. J.P. Morgan will become the largest, surpassing Bank of America.
The willingness of J.P. Morgan to cover all of Washington Mutual's deposits narrowly averts a massive hit on the FDIC. Washington Mutual held $188 billion in deposits as of June, far more than any bank that has ever failed. Analysts estimated that a Washington Mutual failure could have soaked up half the money in the government insurance fund, forcing a huge increase in the premiums paid to the fund by other banks.
Bair said Washington Mutual lacked the cash to fund its business. Since Sept. 15, depositors pulled $16.7 billion from the bank, and the company's bond rating, a measure of its financial health, was slashed several times until Washington Mutual was ranked among the nation's most fragile companies.
Congress is currently debating a plan designed to relieve pressure on troubled banks by buying their mortgage-related investments. That could have helped Washington Mutual, but regulators decided that waiting any longer "was not a responsible decision to make," Bair said.
She said the FDIC had been planning to seize the company Friday night but acted yesterday because of concerns that media leaks would scare depositors. "This was an eroding situation," Bair said.
Washington Mutual, based in Seattle, made thousands of mortgage loans that its borrowers cannot repay. That has left it saddled with billions of dollars in bad debts. The company has posted losses for three straight quarters, including a loss of $3.3 billion for the most recent quarter, ending in June.
Last week, the company placed itself on the auction block, but bidders failed to materialize.
J.P. Morgan submitted the highest bid in an auction regulators held Wednesday night, buying Washington Mutual's 2,200 branches, its $135 billion in remaining deposits -- and its vast portfolio of troubled investments in mortgage-related securities. The deal does not affect depositors -- even those with deposits over the federal insured maximum -- or people with mortgage loans held by Washington Mutual.
J.P. Morgan said that it would immediately write down $31 billion to reflect the deteriorated value of those investments and that it would add $3.6 billion to its own loss reserves. The company also said it would issue $8 billion in common stock this morning before the markets open, creating the larger capital cushion it needs to absorb the troubled company.