Top News September 26, 2008, 12:01AM EST

JPMorgan Chase to Buy Washington Mutual

In a deal brokered by the federal government, JPMorgan Chase will pay $1.9 billion for deposits and branches. WaMu depositors will be protected

Washington Mutual's long, drawn-out struggle to find a buyer came to an end late Thursday, Sept. 25, when it was announced that the nation's largest savings and loan would be bought by an even larger rival, JPMorgan Chase (JPM). WaMu customers are not expected to see any disruption in service. The deal, brokered by federal regulators, resolves the largest bank failure in U.S. history. WaMu (WM) had $310 billion in assets.

Regulators have been trying desperately to prevent the kind of run on the bank that occurred when the Federal Deposit Insurance Corp. seized IndyMac bank in July. "They had to act," former banking exec William Seidman told CNBC. Seidman led America through a previous financial crisis as head of the government's Resolution Trust Corp. in the early 1990s. The FDIC will briefly take over WaMu's deposits and branches before handing them over to JPMorgan. In exchange, the FDIC will receive $1.9 billion. JPMorgan did not acquire claims by equity, subordinated and senior debt holders, the FDIC said.

The deal is a big win for Jamie Dimon, JPMorgan's CEO. The big bank lacks a strong presence on the West Coast. WaMu's 2,200 branches include top-three market-share positions in California and Washington State. Once combined with WaMu, JPMorgan will have No. 1 positions in New York, Chicago, Dallas, Houston, and Phoenix.

For his $1.9 billion, Dimon gets WaMu's deposits along with $176 billion of home loans, on which JPMorgan is expected to lose some $31 billion. These include home equity and options-ARM loans where losses exceed 20%. Dimon emphasized the branch network JPMorgan will pick up. "This builds a big franchise for us. The only negative in the thing was how to handle these bad assets. We think this deal is extremely compelling," he said.

Credit Quality Problems

WaMu had been trying to sell itself for several weeks. A half-dozen potential buyers kicked the tires. The big stumbling block was just what would happen with the bank's huge real estate loan portfolio, totaling some $239 billion. "They have a valuable franchise," Stuart Plesser, a banking analyst at Standard & Poor's, said. "This is a terrible credit-quality bank. Its problem had more to do with credit than deposits."

In a fact sheet it issued on the deal, the FDIC said all depositors will be fully protected. In a statement released late Thursday, WaMu's regulator, the federal Office of Thrift Supervision, said "business will proceed uninterrupted and bank branches will open on Friday morning as usual." OTS Director John Reich said "the housing market downturn had a significant impact on the performance of WaMu's mortgage portfolio and led to three straight quarters of losses totaling $6.1 billion." The OTS said "an outflow of deposits" began on Sept. 15 that totaled $16.7 billion. That left WaMu with "insufficient liquidity" and in "unsafe and unsound condition," the agency said.

The big losers are WaMu shareholders, who are wiped out. On Thursday afternoon, before the deal was announced, WaMu's stock price closed down 57¢, or 25%, to 1.69. Then, in after-hours trading, the shares lost another 73%, to 0.45. That's down from 36.47 last October.

The biggest WaMu shareholder is investor David Bonderman, who led a $7.2 billion private equity consortium that bought WaMu preferred stock in April. Bonderman had made a much more lucrative investment during the last savings and loan bust in the 1990s. Back then, he advised investor Robert Bass on his purchase of California's American Savings & Loan after the government agreed to take the bank's bad loans. American was later sold to WaMu at a sharp premium.

Reader Discussion


Business Exchange

Track and share business topics across the Web.



BW Mall - Sponsored Links