Sep 26, 2008 10:57 pm US/Eastern
WaMu Failure Largest In U.S. Bank History
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The owners of one of South Florida's largest bank chains collapsed late Thursday night, becoming the largest bank failure in U.S. history. The Federal Deposit Insurance Corporation seized Washington Mutual and then sold the banking assets to JPMorgan & Chase Company for $1.9 billion. Have a question about the WaMu Collapse: Ask It Here!
Washington Mutual, or WaMu, had 125 branches and around $8.8 billion in banking deposits in the South Florida market, according to the FDIC. That amount of business placed WaMu as the third largest bank in South Florida behind Wachovia and Bank of America.
On Friday morning as customers arrived at their bank branch in Westchester, in southwest Miami-Dade, there wasn't a sense of worry over their accounts.
A bank manager told CBS4 Reporter Gwen Belton "it's business as usual, and customers have nothing to fear".
Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.
The failure of WaMu came just hours after a potential deal over a $700 billion bailout with Congress collapsed. Both parties blamed the other for the collapse of the deal; the main stumbling block appeared to be House Republicans. The Senate has agreed to a deal with House Democrats.
As Thursday's trading session came to a close, WaMu had lost most of it's stock value. After hours trading left WaMu's stock at just $.45, after soaring as high as $36.47 a share in the past year.
The collapse and sale of WaMu's banking chain, left some customers confused about what was going on with their bank. According to the FDIC, customers should still continue making payments on loans that are still outstanding with the bank, as those deals are still in place.
In addition, any customers who have loans or anything else that have interest rates, JPMorgan Chase will be reviewing customer's rates starting Friday.
One positive that came from the sale of WaMu's assets to JPMorgan Chase is that it will prevent the bank's collapse from taking out a large chunk of the FDIC's insurance fund. That fund is what the federal government uses to guarantee a bank customer's deposits, typically up to $100,000 to $250,000 depending on the type of account.
Because of WaMu's souring mortgages and other risky debt, JPMorgan plans to write down WaMu's loan portfolio by about $31 billion - a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.
"We're in favor 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.
The late Thursday night purchase of WaMu marks the second time this year JPMorgan Chase has stepped in to acquire a major financial institution that was on the verge of collapse. In March, JPMorgan bought investment bank Bear Stearns for about $1.4 billion, plus another $900 million in stock ahead of the completion of the deal. Just like the WaMu purchase on Thursday, the federal government had to step in to aid the purchase of Bear Stearn as well.
JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., 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 Thursday it plans to sell $8 billion in common stock to raise capital.
The downfall of WaMu has been widely anticipated for some time because of the company's heavy mortgage-related losses. 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. The bank had lost $16.7 billion in deposits in just fewer than 3 weeks. According to the Office of Thrift Supervision reported on Thursday night WaMu had insufficient liquidity to meet all of its obligations.
"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 Friday morning."
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 $7 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 subprime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Adjustable Rate Mortgage loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.
South Florida's housing market collapse didn't help WaMu's bottom line. South Florida's three counties had the highest delinquency rates in the country. Miami-Dade county was the worst with a delinquency rate of 12.84 percent, according to the South Florida Business Journal.
Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $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 subprime 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 subprime loans.
In December, WaMu said it would shutter its subprime 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 5,400 branches in 23 states, and that it plans to close less than 10 percent 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 approximately $1.5 billion while achieving pretax savings of approximately $1.5 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 $31 billion writedown to WaMu's portfolio.
(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)
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