JPMorgan to Buy WaMu

25 09 2008

JPMorgan Chase acquired the troubled thrift Washington Mutual Inc., the Federal Deposit Insurance Corporation announced late Thursday, marking yet the latest stunning development in the ongoing credit crisis.

Under the deal, which was shepherded by federal banking regulators, JPMorgan Chase will acquire all the banking operations of the Seattle-based WaMu, as well as its assets and financial contracts.

JPMorgan Chase (JPM, Fortune 500) will also make a payment of $1.9 billion. Separately, JPMorgan announced it was planning to raise $8 billion in additional capital through the sale of stock as part of the deal.

The Office of Thrift Supervision shut down the bank on Thursday and named the FDIC as receiver. WaMu is the 13th bank to fail so far this year.

“For bank customers, it will be a seamless transition,” said FDIC Chairman Sheila Bair. “There will be no interruption in services and bank customers should expect business as usual come Friday morning,”

Shares of WaMu (WM, Fortune 500), which finished the day down 25%, plunged an additional 73% in after hours trading on the news.

WaMu and a subsidiary, Washington Mutual FSB, have combined assets of $307 billion and total deposits of $188 billion.

WaMu, the nation’s largest savings and loan, has been one of the most hard-hit banks during the financial crisis. Many of its assets are tied up in mortgages, many of which have gone sour as housing prices fell.

The company’s stock freefall, combined with several ratings agency downgrades, has led many analysts to speculate that the endgame for the embattled savings and loan was imminent.

The Seattle-based thrift, which has about 2,300 locations nationwide, reportedly put itself up for sale last week. Several other large institutions, including Wells Fargo (WFC, Fortune 500), Citigroup (C, Fortune 500) and HSBC (HBC), reportedly had pored over the company’s books.

Earlier Thursday, reports surfaced that WaMu had approached private equity firms about a potential takeover of the firm, and that federal regulators are also rushing to broker a deal as financial pressures mount on the firm.

WaMu has been hit by a series of credit downgrades in the past month, which has increased the urgency on the company to find a buyer. Credit agency Standard & Poor’s downgraded WaMu on Wednesday, lowering the firm from junk status to an even lower junk status.

Rating agency DBRS also downgraded WaMu on Wednesday, lowering the holding company’s credit rating to junk bond status but keeping the firm’s banking business at investment grade status.

The fall of Washington Mutual is the latest turn in a dizzying two weeks that has seen the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America (BAC, Fortune 500) and the near collapse of insurance giant AIG (AIG, Fortune 500).

The widening credit crisis has prompted President Bush to seek from Congress extraordinary authority to spend as much a $700 billion to bail out the nation’s financial system by purchasing toxic assets from banks.

President Bush, in a televised address on Wednesday night, said the nation is in the middle of a “serious financial crisis” that threatens the economy. “The market is not functioning properly,” Bush said. There is a widespread loss of confidence. America could slip into a financial panic.”

This year, 12 other banks have been forced to close their doors. In July IndyMac was closed down marking the largest collapse of an FDIC-insured institution since 1984. The Pasadena, Calif.-based bank failed because it backed risky home loans.

Federal regulators were quick to point out Thursday evening that the WaMu-JPMorgan Chase deal would not have any impact to its insurance fund which covers customer deposits when banks fail.

“WaMu’s balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses,” Bair said.

When IndyMac was shut down, it had assets of $32 billion and deposits of $19 billion. The FDIC protected most of IndyMac customer’s assets.

The FDIC insures the assets held by the 8,451 institutions with a total of $13.4 trillion.


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