Washington Mutual, just days ago the nation's biggest thrift and once its biggest mortgage lender, earned a final, notorious distinction Thursday: It became by far the biggest U.S. bank in history to fail.
Washington Mutual, just days ago the nation’s biggest thrift and once its biggest mortgage lender, earned a final, notorious distinction Thursday: It became by far the biggest U.S. bank in history to fail.
Seattle-based WaMu, laid low by its plunge into subprime mortgages and other less-than-sterling loans, was seized and closed by federal regulators Thursday afternoon. JPMorgan Chase, which has long coveted WaMu, bought all its deposits and banking assets for $1.9 billion.
“This is the big one that everybody was worried about,” said Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., in an evening conference call. “I was worried about it.”
WaMu has been struggling to turn itself around for the past year, after it became clear falling home prices and the collapsed market for mortgage-backed securities had left it holding billions of dollars’ worth of dubious loans.
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But the thrift’s financial situation deteriorated rapidly in the past two weeks, as credit-rating agencies slashed WaMu’s debt to junk-bond status and deposits began flowing out at an alarming pace.
Despite offering 5 percent interest on one-year certificates of deposit — one of the highest rates in the country — WaMu lost $16.7 billion in deposits between Sept. 15 and this past Wednesday.
In the end, JPMorgan Chase took over $134.7 billion in deposits from WaMu. Less than three months earlier, WaMu had held $181.9 billion in deposits.
“This institution was under extreme liquidity pressure, and it needed to be addressed this week,” Bair said.
Regulators couldn’t afford to wait until Congress and the Bush administration agreed on a bailout package for the financial-services industry, which might have relieved some of the pressure on WaMu, she said: “We don’t know who it will help or how it will help.”
JPMorgan, which earlier this year offered to buy WaMu for $7 billion in stock — a deal former CEO Kerry Killinger turned down in the belief he could salvage the company — was the high bidder in an auction the FDIC conducted Wednesday, Bair said. Three other banks submitted bids for WaMu’s banking assets.
Hit for headquarters
WaMu’s 43,200 employees won’t feel any immediate impact, though it’s likely JPMorgan will drastically shrink the thrift’s headquarters staff. More than 3,500 people work at WaMu’s 42-story headquarters at Second Avenue and Union Street, along with 800 people elsewhere in Seattle and 1,500 people elsewhere in Washington state.
WaMu is also downtown’s largest office tenant, with about 1.6 million square feet in the central business district. It put some space on the market in recent months, helping raise downtown’s vacancy rate.
JPMorgan reportedly sent e-mails to all WaMu employees asking them to report for work as usual today.
WaMu spokespeople did not return calls for comment.
As word of WaMu’s seizure and sale started leaking out Thursday afternoon, hordes of grim-faced employees poured out of WaMu Center, many commiserating over whether they would keep their jobs and others clutching cellphones.
“It sucks,” said one man who asked not to be named.
Another man said it felt familiar: “I’ve been through this with the dot-coms, so it’s just starting to seem like part of the normal business cycle.”
New York-based JPMorgan, whose consumer banks operate under the Chase brand, will acquire 2,207 WaMu branches in 15 states — giving it the coast-to-coast presence CEO Jamie Dimon has long wanted.
JPMorgan will have 5,410 retail branches in 23 states and more than $900 billion in deposits. It said it expects to close fewer than 10 percent of the combined branches, in overlapping markets.
In a statement late Thursday, JPMorgan said it planned to write down WaMu’s loan portfolio by approximately $31 billion and sell $8 billion in common stock to bolster its own capital position.
This is the second time in six months regulators have called on JPMorgan to rescue a failing financial firm: It bought brokerage Bear Stearns in March.
Branches open as usual
WaMu banking customers shouldn’t see any interruption in access to their money. All WaMu branches will be open as usual today, and because JPMorgan took over WaMu’s entire deposit base — including account balances above the FDIC’s standard $100,000 cap — the FDIC’s insurance fund won’t be needed to protect customer deposits.
“People need to do absolutely nothing,” Bair said.
The WaMu name will give way to the Chase name over the next two years, JPMorgan said.
WaMu investors, for the most part, are out in the cold.
The $1.9 billion that JPMorgan paid for WaMu’s operations will go into a fund overseen by the FDIC for WaMu’s creditors. The only investors likely to get anything will be holders of WaMu’s senior unsecured debt. With $7 billion of that outstanding, those investors are looking at a payout of around 27 cents on the dollar.
Stockholders will get nothing, as will holders of more than $11 billion in WaMu subordinated debt and preferred stock. That includes private-equity fund TPG, which along with big institutional shareholders pumped $7.2 billion into WaMu five months ago.
WaMu’s ordinary shareholders already had seen nearly the entire value of their stakes wiped out by the relentless stock slide. In what turned out to be its last trading day Thursday, the stock closed at just $1.69, down 57 cents; a year ago, they stood at $35.40.
Thursday’s dramatic events come less than three weeks after Alan Fishman was brought in as WaMu’s CEO. He replaced longtime chief Killinger, who built WaMu into a nationwide lending giant through a string of acquisitions but whom many investors and employees blamed for leading it into the swamp of subprime mortgages.
Fishman was flying back to Seattle from New York when the FDIC moved in, The New York Times reported. WaMu’s board also was “completely in the dark.”
WaMu’s demise dwarfs what up to now had been the biggest bank failure in U.S. history, the 1984 collapse of Continental Illinois. At the time regulators intervened, Continental was the nation’s seventh-largest bank, with about $40 billion in assets; as of June 30, WaMu had $309.7 billion in assets.
The WaMu action caps a year in which the FDIC has taken over a dozen other banks, including California-based IndyMac, with $32 billion in assets. It was seized in July.
Reporters Melissa Allison and Eric Pryne contributed to this story.
Drew DeSilver: 206-464-3145 or firstname.lastname@example.org