WaMu Taken Over by JPMorgan, WaMu’s long decline
Ted S. Warren/AP

WaMu Taken Over by Government, Then JPMorgan

September 26, 2008 12:54 PM
by Anne Szustek
Washington Mutual, plagued by millions in losses from bad mortgages, was seized by the U.S. government Thursday and is being taken over by JPMorgan Chase for $1.9 billion.

WaMu No More

The federal Office of Thrift Supervision closed down Washington Mutual on Thursday, making the FDIC (Federal Deposit Insurance Group) the receiver. JPMorgan Chase stepped in with $1.9 billion, formally putting WaMu’s long decline to an end.

JPMorgan is now the largest U.S. bank in terms of deposits. Bloomberg quoted JPMorgan CEO Jamie Dimon as saying, “This is a fabulous franchise. … We think we got this at a price that protects us, where if we were wrong, it still protects us.”

WaMu customers had pulled out $16.7 billion in deposits since Sept. 16, draining the bank’s liquidity and signaling government authorities to step in. “With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,” the Office of Thrift Supervision was quoted as saying by Reuters.

WaMu’s credit rating had been downgraded to junk status earlier. And last week, facing $19 billion in losses on the back of bad mortgages, the bank went up for sale. More than $50 billion of WaMu’s holdings were tied up in option adjustable-rate mortgages, which allow borrowers to pay minimum installments that may not even cover interest accrued over the payment period. Compounding WaMu’s sub-prime woes was the fact that many of its option ARMs were to lenders in Florida and California, two states hit particularly hard by foreclosures.

Earlier this week, reports emerged that private equity firms The Blackstone Group and The Carlyle Group were considering buying WaMu, but JPMorgan had long been in the wings as a buyer.

JPMorgan had been considering investing in WaMu as early as March but negotiations fell through after private equity fund TPG agreed to inject $7 billion of capital into WaMu bank in April. WaMu’s skidding share price continuously “decimated” the value of TPG’s investment over the following months, as Investment Dealer’s Digest put it.

Background: The rise and fall of WaMu

Under the tutelage of WaMu CEO Kerry Killinger, who became president of the bank in 1988 and chief executive two years later, WaMu expanded from regional saving-and-loan crisis survivor to the nation’s largest bank through acquisitions. Snappy commercials on network TV promoting WaMu’s free checking and bank branches with hipster allure that the Seattle Post-Intelligencer likened to that Starbucks increased its appeal across the country.

But unlike the savings-and-loan scandal, which helped WaMu get a leg up in the industry, the sub-prime mortgage crisis depleted the bank’s liquidity and left the bank with a “financial position … among the worst of any major U.S. financial institution,” writes The Wall Street Journal. Killinger was axed as WaMu CEO on Sept. 8, replaced by Alan Fishman, chair of Meridian Capital Group, suggesting that the bank was prepping for a merger.

In addition to drowning in sub-prime debt, the bank’s customer service ratings also took a hit: the Los Angeles Better Business Bureau gave WaMu a D rating, meaning that the bureau has concerns about the company’s dealings and recommends “caution in doing business with it.”

The Puget Sound Business Journal in 2002 rounded up other sets of complaints from customers and mortgage brokers, claiming WaMu failed to record mortgage payments, resulting in borrowers getting artificially lower credit scores and, in one case, saw their house foreclosed. Customers took up a class-action lawsuit against the bank filed by law firms in Seattle and San Francisco.

The shaky state of the financial sector was a big reason WaMu did not have a line of suitors in waiting. FAS 157, a new rule instituted by the U.S. Financial Accounting Standards Board, is another. Set to become effective in December, FAS 157 stipulates that any major write-downs to assets that have gone unaccounted on balance sheets must be noted on accounts following a merger or acquisition. Seeking Alpha’s Edward Harrison writes that the regulation could have dissuaded regional banks from buying into larger ones like WaMu.

“With loans fetching their greatest discounts since the Great Depression, it sharply reduces the value of a target’s assets,” Harrison quotes Columbia Business School instructor Robert Willens as saying. “That will force an acquirer to raise additional capital in this very difficult environment.”

At least three possible buyers had shied away from investing in WaMu or National City Bank, based in Cleveland, because of the rule, said two bankers involved in the negotiations.

Reference: Guide to Finance


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