JPMorgan acquiring Washington Mutual Bank

September 25, 2008 8:37:40 PM PDT
JPMorgan Chase & Co. Inc. came to the rescue of Washington Mutual Inc. Thursday, buying the thrift's banking assets after WaMu was seized by the Federal Deposit Insurance Corp. in the largest failure ever of a U.S. bank. This is the second time in six months that JPMorgan Chase has taken over a major financial institution crippled by bad bets in the mortgage market. The deal will cost JPMorgan Chase $1.9 billion, and the bank said in a statement it planned to write down WaMu's loan portfolio by approximately $31 billion. JPMorgan Chase, which acquired Bear Stearns Cos. last March, also said it would sell $8 billion in common stock to raise its capital position.

The FDIC, which insures bank deposits, said it would not have to dip into the insurance fund as a result of the seizure. There had been concerns that the fund, which took a big hit after the seizure of IndyMac Bank, could be depleted by a WaMu seizure.

WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.

"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 government measures bank failures by an institutions's assets; Seattle-based WaMu has roughly $310 billion in assets. The previous record was the failure of Continental Illinois National Bank in 1984, with $40 billion in assets when it closed. IndyMac, seized in July, had $32 billion.

WaMu was searching for a lifeline after piling up billions of dollars in losses due to failed mortgages; it has seen its stock price plummet 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.

The Bush administration's proposal for a $700 billion bailout for distressed financial institutions was believed to have given fresh impetus to a buyout and new allure to WaMu. However, it was not immediately known how the bailout, which was still being negotiated in Washington late Thursday, would affect the JPMorgan Chase-WaMu deal.

JPMorgan Chase's chief executive, Jamie Dimon, said in a conference call, said the "only negative" related to the deal was "how to handle some of these bad assets." He did not elaborate.

Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were all mentioned as possible suitors. WaMu was also believed to be talking to private equity firms.

The FDIC was seeking a buyer will to bear a large burden of WaMu's losses to lessen the impact on the insurance fund.

In a statement, JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks, or any assets or liabilities of the holding company, Washington Mutual Inc.

JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states. JPMorgan Chase said it plans to close less than 10 percent of the two companies' branches; the bank has not yet decided which to close.

In March, the bank acquired the failing Bear Stearns in a deal brokered by the government. It paid $2.3 billion for the company and its stock, bringing its expenditure on both Bear Stearns and WaMu to a total of $4.2 billion.

In the wake of Wall Street's overhaul, Bank of America Corp. is on track be the nation's largest bank by assets once its acquisition of brokerage Merrill Lynch & Co. is completed. JPMorgan Chase & Co. will be close in total assets to Citigroup Inc., at just above $2 trillion, after the WaMu buy.

Washington Mutual ran into trouble after it got caught up in the booming part of the mortgage business that made loans to people with bad credit, known as subprime borrowers.

Troubles spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.

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. Killinger was replaced as CEO earlier this month by Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank.

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.

WaMu became one of the first retail banks to seek outside cash in the wake of the credit crisis when it agreed to sell equity securities to an investment fund managed by TPG Capital and to other investors this spring, raising $7.2 billion in fresh capital.

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.

JPMorgan Chase said the WaMu acquisition would add 50 cents per share to its earnings in 2009, and said it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.

Before Thursday's announcement, there were concerns that the FDIC would have to turn to taxpayers to build up its fund, which has dipped from $52.4 billion at the end of last year to $45.2 billion, mostly because of the costs of IndyMac's failure.

Next month, Bair plans to propose increasing the premiums paid by banks and thrifts to replenish the fund. That plan is likely to be approved by the FDIC board. It is scheduled to be presented at a board meeting on Oct. 7, FDIC spokesman Andrew Gray said Thursday.

The deal ultimately leaves TPG, the private equity firm that ushered in $7 billion in fresh capital for the bank this spring, on the sidelines empty handed.

"We are dissatisfied with the loss to our partners from our investment in Washington Mutual," said TPG spokesman Owen Blicksilver. "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."


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