13th bank failure -- WAMU!!!
13 is a real unlucky number. Biggest bank failure, dwarfs IndyMac. That is why they negotiated it with JP Morgan ahead of time. This would have been a market routing event again. Now I'm seeing why the shorting ban. there is a lot of bad news this past two weeks.
Regulators seize Washington Mutual and JPMorgan mops up
Robin Sidel and David Enrich | September 27, 2008
IN what is by far the largest bank failure in US history, federal regulators seized Washington Mutual and struck a deal to sell the bulk of its operations to JPMorgan Chase.
The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis. But the deal, as constructed by the Federal Deposit Insurance Corporation, could hold some glimmers of hope for the beleaguered banking system because it averts any hit to the bank insurance fund.
Instead, JPMorgan agreed to pay $US1.9 billion ($2.3 billion) to the Government for WaMu's banking operations and will assume the loan portfolio of the $US307 billion thrift. The full cost to JPMorgan will be much higher, because it plans to write down about $US31 billion of the bad loans and raise $US8 billion in new capital. All WaMu depositors will have access to their cash, but holders of more than $US30 billion in debt and preferred stock are likely to recover little or nothing.
The deal will vault JPMorgan into first place in nationwide deposits and greatly expand its franchise.
The fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.
The seizure of Washington Mutual is likely to send tremors through the thrift industry. Many of WaMu's smaller brethren are also struggling with a wave of bad loans and some have already been ordered by regulators to raise capital and stop growing. Many community and regional financial institutions are also slashing dividends, selling branches and reining in lending.
WaMu has suffered huge losses but still boasts a strong deposit base and a network of 2239 branches that bigger banks would have paid dearly for when times were good. In March, with the credit crisis in full bloom, JPMorgan offered to acquire WaMu but was spurned in favour of a $US7 billion infusion led by TPG, a highly regarded private equity firm. TPG, led by investor David Bonderman, said it would lose $US1.35 billion, wiping out its investment.
This is the second time that JPMorgan, the second-largest US bank by market capitalisation, has been a buyer of last resort. In March, the New York company agreed to purchase Bear Stearns, getting a $US29 billion backstop from the federal Government.
DIC chairman Sheila Bair said that WaMu's downward spiral "could have posed significant challenges without a ready buyer."
Referring to JPMorgan's willingness to buy WaMu and absorb its shaky loans amid continuing debate over the $US700 billion bailout package, she added: "Some are coming to Washington for help, others are coming to Washington to help."
While WaMu has been struggling since last year, its demise occurred with breathtaking speed.
Starting on September 15, the day that Lehman filed for bankruptcy protection, WaMu's customers began heading for the exits.
Over the next 10 days, they yanked a total of $US16.7 billion in deposits out of the bank, according to the Office of Thrift Supervision.
Regulators also hustled to shut down WaMu faster than they have with other failing banks this year.
Normally, when the FDIC and another regulatory agency are preparing to take over a bank, the FDIC will solicit bids for the bank on Tuesday or Wednesday and then seize it on Friday evening, after the bank's branches have closed for the weekend.
In WaMu's case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts ofWaMu.
Twenty-four hours later, they were already preparing to seize the bank.
Earlier this month, Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal offered by JPMorgan earlier this year, according to a person close to WaMu.
Federal regulators said the exodus of deposits left WaMu "with insufficient liquidity to meet its obligations".
As a result, WaMu was in "an unsafe and unsound condition to transact business", according to the OTS.
With mortgage losses mounting and its stock price plunging, WaMu has been scrambling over the past month to find a solution.
Last week, it put itself on the auction block. A number of banks -- including Citigroup, Wells Fargo and Banco Santander -- pored over WaMu's books, but the bank did not receive any offers.
This week, WaMu's outside bankers approached a group of private equity funds to gauge their interest in a deal. Those talks were viewed as a last-ditch effort.
Also this week, the FDIC took the step of reaching out to banks, asking them to express interest in taking over some or all of WaMu, according to people familiar with the matter. Those bids were due at 6pm on Wednesday.
JPMorgan's takeover of WaMu's deposits represents a huge blow for private equity firm TPG, which led the deal to inject $US7 billion into the thrift earlier this year.
"Obviously, we are dissatisfied with the loss to our partners from our investment in Washington Mutual," said a TPG spokesman.
"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."
The deal is a bold move for James Dimon, JPMorgan's chairman and chief executive, who has emerged as one of the banking industry's most powerful executives during the current credit crisis.
Just six months ago, JPMorgan swept in to acquire Bear Stearns as the brokerage firm was collapsing and heading for bankruptcy.
Although JPMorgan has also been hurt by the credit crisis, it has one of the strongest balance sheets in the industry despite exposure to many of the banking businesses that are feeling pain.
Additional reporting: Dan Fitzpatrick, Damian Paletta and Peter Lattman
