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As the debate over a US$700-billion ($840 billion) bank bail-out rages on in Washington, one of the largest US banks - Washington Mutual Inc. -has collapsed under the weight of its enormous bad bets on the mortgage market.
The Federal Deposit Insurance Corporation seized WaMu yesterday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for US$1.9 billion ($2.28 billion).
Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in America's history. Its US$307 billion ($368 billion) in assets eclipse those of Continental Illinois National Bank, which failed in 1984 with US$40 billion in assets; adjusted for 2008 dollars, its assets totalled US$67.7 billion ($81.2 billion). IndyMac, seized in July, had US$32 billion ($38.4 billion) in assets.
One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.
Because of WaMu's souring mortgages and other risky debt, JPMorgan plans to write down WaMu's loan portfolio by about US$31 billion ($37.2 billion) - a figure that could change if the government goes through with its bail-out plan and JPMorgan takes advantage of it.
"We're in favour of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.
WaMu is JPMorgan Chase's second acquisition this year of a major financial institution hobbled by losing bets on mortgages. In March, JPMorgan bought the investment bank Bear Stearns Cos. for about US$1.4 billion (A$1.7 billion), plus another US$900 million ($1.1 billion) in stock ahead of the deal to secure it.
JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corporation, which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world's largest insurer, getting taken over by the government.
JPMorgan also said it plans to sell US$8 billion ($9.6 billion) in common stock to raise capital. Its stock rose in midday trading today on the New York Stock Exchange, gaining US$1.90, or 4.37 per cent, to US$45.36.
The downfall of WaMu has been widely anticipated for some time because of the company's heavy mortgage-related losses. As investors grew nervous about the bank's health, its stock price plummeted 95 per cent from a 52-week high of US$36.47 to its close of US$1.69 yesterday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.
WaMu "was under severe liquidity pressure", FDIC chairman Sheila Bair told reporters in a conference call.
"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come this morning."
Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.
The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which led a US$7 billion (A$8.4 billion) cash infusion in the bank this spring, on the sidelines empty handed.
WaMu ran into trouble after it got caught up in the once-booming sub-prime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.
Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost US$48 million, compared with net income of about US$1 billion in 2005.
At the start of 2007, following the release of the company's annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its sub-prime mortgage lending and servicing of loans. Alan H Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank, replaced Killinger earlier this month.
As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.
At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made sub-prime loans.
In December, WaMu said it would shutter its sub-prime lending business and reduce expenses with layoffs and a dividend cut.
The bank in July reported a $3 billion second-quarter loss - the biggest in its history - as it boosted its reserves to more than $8 billion to cover losses on bad loans. Over the last three quarters, it added $10.9 billion to its loan-loss provisions.
JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company.
JPMorgan Chase said the acquisition will give it 5400 branches in 23 states, and that it plans to close less than 10 per cent of the two companies' branches.
The WaMu acquisition would add 50 cents per share to JPMorgan's earnings in 2009, the bank said, adding that it expects to have pretax merger costs of about US$1.5 billion ($1.8 billion) while achieving pretax savings of about US$1.5 billion ($1.8 billion) by 2010.
"This is a definite win for JPMorgan," said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the US$31-billion ($37.2 billion) writedown to WaMu's portfolio.
- AP
