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Feds sell many Washington Mutual assets
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Published: September 26, 2008
Washington Mutual, the major lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators last night in an 11th-hour bid to prevent the largest bank failure in American history.
Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual to J.P. Morgan Chase. The remainder of WaMu, the nation's largest savings and loan, will be operated by the government.
Shareholders and some bondholders will be wiped out. WaMu depositors are guaranteed by the Federal Deposit Insurance Corp. up to the $100,000 per account limit. WaMu customers are unlikely to be affected.
J.P. Morgan Chase will take control today of all of WaMu's 2,300 branches, which stretch from New York to California, and will oversee its big portfolio of mortgage and credit-card loans. It will also acquire all of WaMu's deposits with the sale.
For weeks, the Federal Reserve and the Treasury Department had been nervous about the fate of WaMu, among the worst-hit by the housing crisis, and pressed hard for the bank to sell itself. As panic gripped financial markets last week because of the collapse of Lehman Brothers, the government stepped up its efforts, working behind the scenes, and at points going behind WaMu's back to work privately with potential bidders on a deal.
The seizure and the deal with J.P. Morgan came as a shock to Washington Mutual's board, which was kept in the dark: the company's newly-minted chief executive, Alan C. Fishman, was in flying from New York to Seattle at the time the deal was finally brokered.
The action removes one of America's most troubled banks from the financial landscape, and helps to avoid sticking taxpayers with a huge bill for the rescue of another failing institution.
As with Lehman Bros., the government allowed Washington Mutual to fail because it was less entangled with the rest of the financial system than a giant like American International Group Inc., which the government spent $85 billion to take over last week as it faced collapse. On Sunday, the government approved emergency steps to help stabilize Goldman Sachs and Morgan Stanley.
Federal regulators had been trying to broker a deal for Washington Mutual because a takeover by the Federal Deposit Insurance Corp. would have dealt a crushing blow to the federal government's deposit insurance fund. The fund, which stood at $45.2 billion at the end of June, has been severely depleted by the sudden collapse of IndyMac Bank. Analysts said that a failure of Washington Mutual would cost the fund upwards of $20 billion.
The deal will end WaMu's run as an independent company, but stabilize the bank's finances and shore up a balance sheet crippled by toxic mortgages. It also comes as legislators have reached a stalemate over the passage of a $700 billion bailout fund intended to help ailing banks.
The shotgun acquisition also marks the second time since the housing crisis began that the government has pushed a troubled bank into the arms of J.P. Morgan Chase. In March, J.P. Morgan Chase rescued Bear Stearns as it teetered into bankruptcy.
It will give J.P. Morgan branches in California and other markets where it does not have a footprint. But J.P. Morgan Chase will also inherit a big loan portfolio of troubled mortgages and commercial real estate.
The emergency takeover of Washington Mutual is yet another black eye for its primary federal regulator, the Office of Thrift Supervision. It also oversaw IndyMac Bank, another big lender that suddenly collapsed in mid-July, and several other deeply troubled savings banks. Washington Mutual was the largest institution under its watch.
Washington Mutual long said that it could remain independent, but it had quietly hired Goldman Sachs early last week to identify potential bidders. Among the banks that expressed interest in buying all or part of Washington Mutual: Citigroup, J.P. Morgan Chase, HSBC, Banco Santander, TD Bancorp, and Wells Fargo. Each had different reasons for making an offer, but nobody could make the numbers work. Several deadlines past without anyone submitting a bid.
Until recently, Washington Mutual was one of Wall Street's strongest performers. It reaped big profits quarter after quarter as its then chief executive, Kerry Killinger, enlarged its footprint by buying banks on both coasts and ramping up mortgage lending.
His goal was to transform what was once a sleepy Seattle thrift into the "Wal-Mart of Banking," which would cater to lower- and middle-class consumers that other banks deemed too risky. It offered complex mortgages and credit cards whose terms made it easy for the least creditworthy borrowers to get financing, a strategy that the bank extended in big cities, including Chicago, New York and Los Angeles. WaMu even rolled out Starbucks-style branches where tellers stood behind kiosks to reduce waiting times in line.
With this grand plan, Killinger built Washington Mutual into the sixth-largest bank in the United States, with about 2,300 consumer and small business branches, total assets of $310 billion, and total deposits of $182 billion.
But underneath the hood, the bank's machinery was failing. Even as it grew in size, it under-invested in the technology needed to gauge how its vast loan operation was performing. Killinger, who once boasted of the company he had created, struggled to integrate the many banks he had picked up. Near the top of the housing market, WaMu had nine different mortgage-underwriting systems.
Then the housing market began to crumble.
Like so many other financial institutions, the bank tried to hedge its mortgage bets -- but did so poorly. It retrenched on its ranch-building ambitions. But none of that was enough to deflate ballooning losses on mortgage loans, or defuse ticking time-bombs such as interest-only and pay-option amortization products that had reeled in bottom-grade borrowers.
WaMu's now-enlarged presence in California and Florida, two epicenters of the housing crisis, made the situation worse.
With rising mortgage payments and higher gas and food bills, WaMu's losses in its big credit-card loan portfolio also rose. In spring, shareholders grew more impatient as finances buckled. Even so, Washington Mutual's board insisted that Killinger deserved more time to orchestrate a turnaround.
By then, however, WaMu's troubles had set off alarm bells on Wall Street, which ground its share price down daily. Suddenly, the bank that once circled its prey became a target.
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