Pat Dollard | Young Americans

Sigh…

Stocking up on can goods, sugar, flour, and ammo. Keep paying our bills, and survive.

WSJ

In Largest Failure in U.S. Banking History

September 26, 2008

In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co.

The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country’s financial crisis. But the deal, as constructed by the Federal Deposit Insurance Corp., could hold some glimmers of hope for the beleaguered banking system because it averts any hit to the bank-insurance fund.

Instead, J.P. Morgan agreed to pay $1.9 billion to the government for WaMu’s banking operations and will assume the loan portfolio of the thrift, which has $307 billion in assets. The full cost to J.P. Morgan will be much higher, because it plans to write down about $31 billion of the bad loans and raise $8 billion in new capital. All WaMu depositors will have access to their cash, but holders of more than $30 billion in debt and preferred stock will likely see little if any recovery.

The deal will vault J.P. Morgan into first place in nationwide deposits and greatly expand its franchise.

The seizure was another watershed event in a frenetic period for the U.S. banking system, and came while members of Congress wrangled over the Bush administration’s proposed $700 billion bailout package. The tally of U.S. financial giants that have either been seized by the government or sold themselves off to stronger firms in recent weeks includes mortgage titans Fannie Mae and Freddie Mac, insurer American International Group Inc., and Wall Street firms Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

The failure of WaMu eclipsed what had long been America’s largest bank bust on record, the 1984 collapse of Continental Illinois, which had $40 billion in assets.

The fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.

The seizure of Washington Mutual is likely to send tremors through the thrift industry. Many of WaMu’s smaller brethren are also struggling with a wave of bad loans and some have already been ordered by regulators to raise capital and stop growing. Many community and regional financial institutions are also slashing dividends, selling branches and reining in lending in order to preserve capital.

WaMu has suffered huge losses but still boasts a strong deposit base and a network of 2,239 branches that bigger banks would have paid dearly for when times were good. In March, with the credit crisis in full bloom, J.P. Morgan offered to acquire WaMu but was spurned in favor of a $7 billion infusion led by the private-equity firm TPG, considered one of the savviest buyout firms. TPG, led by investor David Bonderman, said it will lose $1.35 billion, wiping out its investment.

This is the second time that J.P. Morgan, the second-largest U.S. bank in stock-market value, has been a buyer of last resort. In March, the New York company agreed to purchase Bear Stearns Cos., getting a $29 billion backstop from the federal government.

FDIC Chairman Sheila Bair said that WaMu’s downward spiral “could have posed significant challenges without a ready buyer.” Referring to J.P. Morgan’s willingness to buy WaMu and absorb its shaky loans amid continuing debate over the $700 billion bailout package, she added: “Some are coming to Washington for help, others are coming to Washington to help.”

While WaMu has been struggling since last year, its demise occurred with breathtaking speed.

Starting Sept. 15, the day that Lehman filed for bankruptcy protection, WaMu’s customers began heading for the exits. Over the next 10 days, they yanked a total of $16.7 billion in deposits, according to the Office of Thrift Supervision. That was about 9% of the thrift’s deposits as of June 30. WaMu declined to comment.

Melody Williams, 50 years old, said in the past 30 days she has moved about $25,000 out of Washington Mutual, spreading it to other financial institutions she thought were stronger, including Wells Fargo & Co. Ms. Williams, the controller for an architecture firm, said she thought that Washington Mutual had gotten “too big for their britches” with too many deals over the years.

Accelerated Shutdown
Regulators also hustled to shut down WaMu faster than they have with other failing banks this year. Normally, when the FDIC and another regulatory agency are preparing to take over a bank, the FDIC will solicit bids for the bank on Tuesday or Wednesday and then seize it on Friday evening, after the bank’s branches have closed for the weekend. Sometimes the FDIC will even wait another week to step in. Every bank to fail this year has been shut down on a Friday. The FDIC steps in on Fridays to ensure a smooth transition so that customers hardly notice the handover.

In WaMu’s case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts of WaMu. Twenty-four hours later, they were already preparing to seize the bank. Earlier this month, Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal J.P. Morgan had offered earlier this year, according to a person close to WaMu.

As pressure mounted on WaMu over the past two and a half weeks, regulators sparred over how to handle the situation, according to people familiar with the matter. Last week WaMu met in Washington, D.C., with the FDIC and OTS, WaMu’s chief regulator. WaMu, according to a person familiar with the situation, asked for the meeting because it had received conflicting information from the two agencies. The tension between the two groups was palpable, this person said. The FDIC, this person said, was more aggressive in describing the information it wanted from the thrift.

Federal regulators said the exodus of deposits left WaMu “with insufficient liquidity to meet its obligations.” As a result, WaMu was in “an unsafe and unsound condition to transact business,” according to the OTS.

The OTS closed WaMu on Thursday and appointed the FDIC as receiver. The FDIC ran the bidding process that resulted in the decision to sell WaMu’s banking operations to J.P. Morgan.

The change, according to OTS, “will have no impact on the bank’s depositors or other customers.” WaMu’s bank branches will open on Friday morning as usual and business will “proceed uninterrupted.”

As of June 30, WaMu had more than 43,000 employees, more than 2,200 branch offices in 15 states and $188.3 billion in deposits, according to the OTS.

“The housing market downturn had a significant impact on the performance of WaMu’s mortgage portfolio,” said OTS director John Reich.

With mortgage losses mounting and its stock price plunging, WaMu has been scrambling over the past month to find a solution. Last week, it put itself on the auction block. A number of banks — including Citigroup Inc., Wells Fargo and Banco Santander SA — pored over WaMu’s books, but the bank didn’t receive any offers. This week, WaMu’s outside bankers approached a group of private-equity funds to gauge their interest in a deal. Those talks were viewed as a last-ditch effort.

Also this week, the FDIC took the step of reaching out to banks, asking them to express interest in taking over some or all of WaMu, according to people familiar with the matter. Those bids were due at 6 p.m. Wednesday.

J.P. Morgan’s takeover of WaMu’s deposits represents a huge blow for private-equity firm TPG, which led a deal to inject $7 billion into the thrift this spring.

“Obviously, we are dissatisfied with the loss to our partners from our investment in Washington Mutual,” said a TPG spokesman. “The unprecedented turmoil in global financial markets and resulting macro crisis of confidence has radically changed the dynamics for all financial institutions, and led to widespread losses among investors throughout the sector.” TPG said its losses are about $1.35 billion, wiping out its investment.

Before the deal, J.P. Morgan ranked as the fourth-largest bank as measured by branches, ranking below Bank of America Corp., Wachovia Corp. and Wells Fargo. Its network of more than 3,100 branches stretches across 17 states with deep penetration in New York, Illinois, Texas, Michigan and Ohio.

Instant Presence
The deal will expand J.P. Morgan’s footprint westward and into the South. Most importantly, it will give J.P. Morgan an instant presence in two states where it is now virtually non-existent: California and Florida. Although both states have been battered by the housing market collapse, they still offer significant potential for J.P. Morgan, which can pitch a slew of financial services that weren’t big business for WaMu, such as wealth management and commercial banking. WaMu has nearly 700 branches in California and operates more than 250 branches in Florida.