WaMu: The biggest bank failure in U.S. history.

JPMorgan Buys WaMu Bank Business as Thrift Seized

Sept. 25 (Bloomberg) — JPMorgan Chase & Co., the third- biggest U.S. bank by assets, agreed to acquire Washington Mutual Inc.’s deposits and branches for $1.9 billion after regulators seized the thrift in the biggest bank failure in U.S. history.

Customers withdrew $16.7 billion from WaMu accounts since Sept. 16, leaving the Seattle-based bank “unsound,” the Office of Thrift Supervision said today. WaMu’s branches will open tomorrow and customers will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.

WaMu’s fate played out as Congress debated an accord to end the global credit crunch that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos., which was itself absorbed by JPMorgan. WaMu in March rebuffed a takeover offer from JPMorgan Chief Executive Officer Jamie Dimon that WaMu valued at $4 a share.

“JPMorgan is getting a steal compared with what they were going to pay,” said Scott Adams, a pension and investment analyst at the American Federation of State, County and Municipal Employees in Oakland, California, which owns WaMu shares. “It’s very tragic.”

CEO Deposed

WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week after firing CEO Kerry Killinger this month. The bank named Alan Fishman as his replacement on Sept. 8, agreeing to pay him a $7.5 million signing bonus and $1 million salary.

In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 45 cents in extended trading following the announcement, which came after the close of regular trading.

New York-based JPMorgan, which announced plans tonight to raise $8 billion by selling common stock, had its outlook lowered to negative by Moody’s Investors Service. Moody’s left its Aa2 rating on JPMorgan unchanged.

JPMorgan won’t acquire WaMu’s liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy.

JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits, the most of any U.S. bank. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said.

The Right Price

“We got this at a price that protects us, where if we were wrong, it still protects us,” Dimon, 52, said in an interview. The FDIC accepted JPMorgan’s bid this morning, he said, and he already sent an e-mail to all of WaMu’s employees.

JPMorgan had 75 people involved in the transaction and “bid to win” because it wanted WaMu’s assets, Dimon said on an earlier conference call today. JPMorgan used its own investment bank to value the mortgages, he said.

“We don’t know and we don’t care” about rival bids for WaMu, he said.

Dimon also said on the conference call that he’s in favor of the government’s proposed $700 billion plan to prop up the banking industry, but didn’t rely on it to complete the deal.

Citigroup Inc., which had been among five potential acquirers, elected not to bid because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.

Write-Offs

JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.

JPMorgan expects its acquisition to add 50 cents per share to earnings in 2009, the company said in a statement today. JPMorgan said it will save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges. JPMorgan will close less than 10 percent of the combined retail shops.

WaMu had about 2,300 branches and $182 billion of customer deposits at the end of June. Its $310 billion of assets dwarf those of Continental Illinois Corp., previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

Debtholders

WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debtholder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that’s below investment grade.

JPMorgan rose $2.96, or 7.3 percent, to $43.46 earlier today in New York Stock Exchange composite trading before the deal was announced. It is little changed for the year.

WaMu lost $6.3 billion in the past three quarters. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets.

WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.

Junk

WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor’s cut the bank’s credit rating twice in nine days, leaving it at CCC. Fitch Ratings and Moody’s Investors Service cut WaMu to junk this month and have BBB- and Ba2 ratings, respectively.

“There were extreme liquidity pressures on this institution exacerbated by some ratings downgrades,” FDIC’s Bair said.

Killinger, WaMu’s ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.

Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.

Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor’s 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans.

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: September 25, 2008 23:42 EDT
By Ari Levy and Elizabeth Hester

Source: Bloomberg

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