Washington Mutual, the giant lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators Thursday night in a bid to prevent the largest bank failure in U.S. history.
Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual to JPMorgan Chase. The remainder of WaMu, the nation's largest savings and loan, will be operated by the government. Shareholders and some bondholders will be wiped out. WaMu depositors are guaranteed by the Federal Deposit Insurance Corp. up to the $100,000 per account limit. WaMu customers are unlikely to be affected.
JPMorgan is to take control today of all of WaMu's 2,300 branches, which stretch from New York to California, and will oversee its big portfolio of mortgage and credit card loans. It will also acquire all of WaMu's deposits with the sale.
By acquiring WaMu, JPMorgan becomes a bigger consumer-banking rival for Bank of America, particularly on the West Coast. BofA has about 6,100 branches nationwide and the combined WaMu-JPMorgan would have about 5,400.
For weeks, the Federal Reserve and the Treasury Department had been nervous about the fate of WaMu, among the worst-hit by the housing crisis, and pressed hard for the bank to sell itself. As panic gripped financial markets last week following the collapse of Lehman Brothers, the government stepped up its efforts, working behind the scenes, and at points going behind WaMu's back to work privately with potential bidders on a deal.
The seizure and the deal with JPMorgan came as a shock to Washington Mutual's board, which was kept in the dark: The company's newly minted chief executive, Alan Fishman, was flying from New York to Seattle at the time the deal was finally brokered, according to sources.
The action removes one of America's most troubled banks from the financial landscape, and helps to avoid sticking taxpayers with a huge bill for the rescue of another failing institution.
As with Lehman Bros., the government allowed Washington Mutual to fail because it was less entangled with the rest of the financial system than a behemoth like American International Group Inc., which the government spent $85 billion to take over last week. On Sunday, the government approved emergency measures to help stabilize Goldman Sachs and Morgan Stanley.
Federal regulators had been trying to broker a deal for Washington Mutual because a takeover by the Federal Deposit Insurance Corp. would have dealt a crushing blow to the federal government's deposit insurance fund. The fund, which stood at $45.2 billion at the end of June, has been severely depleted, and a failure of Washington Mutual would have cost the fund $20 or $30 billion.
The shotgun acquisition marks the second time since the housing crisis began that the government has pushed a troubled bank into the arms of JPMorgan Chase. In March, JPMorgan Chase rescued Bear Stearns.
Until recently, Washington Mutual was one of Wall Street's strongest performers. But underneath the hood, the bank's machinery was failing.
Then the housing market began to crumble.
Like so many other financial institutions, the bank tried to hedge its mortgage bets. But nothing was enough to deflate ballooning losses on mortgage loans.