U.S. Seizes WaMu, Sells Part To JPMorgan

Nation's Largest Thrift Bank Was Searching For A Lifeline After Credit Rating Downgrade Pointed To Uncertain Future

(CBS/ AP)  JPMorgan Chase & Co. Inc. came to the rescue of ailing Washington Mutual Inc. Thursday, buying the ailing thrift's banking assets after WaMu was seized by the Federal Deposit Insurance Corp. This is the second time in six months that JPMorgan Chase has taken over a major financial institution crippled by bad bets in the mortgage market.

The deal will cost JPMorgan Chase $1.9 billion, and the bank said in a statement it planned to write down WaMu's loan portfolio by approximately $31 billion. JPMorgan Chase, which acquired Bear Stearns Cos. last March, also said it would sell $8 billion in common stock to raise its capital position.

The FDIC, which insures bank deposits, said it would not have to dip into the insurance fund as a result of the seizure. There had been concerns that the fund, which took a big hit after the seizure of IndyMac Bank, could be depleted by a WaMu seizure.

The Seattle-based WaMu, the nation's largest thrift, has roughly $310 billion in assets and was searching for a lifeline after piling up billions of dollars in losses due to failed mortgages. WaMu has seen its stock price plummet by 87 percent this year, and it suffered a ratings downgrade by Standard & Poor's earlier this week that put it in danger of collapse.

The Bush administration's proposal for a $700 billion bailout for distressed financial institutions was believed to have given fresh impetus to a buyout and new allure to Washington Mutual. Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were all mentioned as possible suitors. WaMu was also believed to be talking to private equity firms.

Congressional negotiations to reach a bailout agreement for the financial crisis collapsed Thursday after a roller-coaster day of talks. Further discussions are expected to resume Friday.

The FDIC was seeking a buyer will to bear a large burden of WaMu's losses, to lessen the impact on the insurance fund.

In a statement, JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks, or any assets or liabilities of the holding company, Washington Mutual Inc.

JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states.

Washington Mutual ran into trouble after it got caught up in the booming part of the mortgage business that made loans to people with bad credit, known as subprime borrowers.

Troubles spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.

Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.

At the start of 2007, following the release of the company's annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans.

As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April.

But that proved to be too little, too late.

At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans.

In December, WaMu said it would shutter its subprime lending business and reduce expenses with layoffs and a dividend cut.

WaMu became one of the first retail banks to seek outside cash in the wake of the credit crisis when it agreed to sell equity securities to an investment fund managed by TPG Capital and to other investors this spring, raising $7.2 billion in fresh capital.

The bank in July reported a $3 billion second-quarter loss - the biggest in its history - as it boosted its reserves to more than $8 billion to cover losses on bad loans.

[dstemills]

Don''t forget the real estate developers who built these over-priced houses then forced the big lenders to issue loans on them even though the only comparable prices were homes in the same subdivision built by the same developers. The execs at the top of the real estate bubble walked away with mansions and retirement money. The rest of us walked away with carpel tunnel syndrome from all the hours worked generating the reports they needed second by second. Plenty of cities and counties were happy to get these new developments build because with new homes came updated infrastructure. But now these cities are looking at abandoned and foreclosed homes and scratching their heads at what went wrong. It was plain old stinky unchecked greed. Now where do all the people go? I guess they go back to where ever they lived before someone seduced them with visions of McMansions and community pools and payments that even a child could make the first year. The price of overly eager hopeful greed is failure unfortunately. We all only have ourselves to blame if we jumped on that bandwagon.

[spiritwalk]

I am amazed that this story is buried on the back page and not front page news. This is the biggest single bank failure in US history.

What is more amazing is that from personal experience I strongly suspect that this is not a failure due to greed but incompetence.

I know someone who has a mortgage with WaMu. They made their payment and then WaMu came back to them and said that they hadn''t paid. They showed WaMu the canceled check and for months they said it was like talking to a brick wall.

I believe what these people told me because I had a WaMu credit card and when it expired the sent me a new card with the old expired date. When I tried to explain it to them I also felt like I was talking to a brick wall. I contacted them 4 times and you have to imagine, as hard as it is to believe, not being able to convince them what month and year it was.

I think when JP Morgan gets in there they are going to find WaMu''s books so messed up that it could take years to figure them out. Not that there was anything crooked going on, but that WaMu made bookkeeping errors on a massive scale.

As I said, I know it is hard to believe and that greed and theft would be the most obvious reason for failure, but I think it will turn out to be unbelievable incompetence that brought them down.

[armydog2]

tapsettle
You are right, this is exactly what bin laden wanted. The USA economy has imploded and he didn''t have to do a thing after 9/11, He realized we had a greedy fool in the whitehouse and he played him perfectly, Mccain will be the same,

[tapsettle]

The beginning of the end, america is starting to collapse and Bin Laden must be joyous in his victory. When the americans start to turn against each other it will be the endgame for Al Qaeda. Bush and Cheney have proved that visionaries of greed are easily defeated and america deserves what it elects.

[oneworldusa]

I for one, am glad to see WaMu go by the wayside and I would not shed tears if HSBC was next.

[txpatriot4us]

Interesting news since WaMu was calling my business trying to get our accounts away from Wells Fargo, just last week.
nobailout.org is fighting what I refer to as the "Greatest Bank Robbery in History" This attempt to coerce and threaten us with dire consequences if we don''t agree garbage, is just that. So who is trying to cover up the theft of the National Treasury?

[oly_joe]

You have to have faith in Congress .. extremely hard to do, I agree .. the Dems are on the right track .. they have pulled the ridulous sum Paulson wanted of $700 Billion and the Dems have it down to $250 Bill .. OK .. the Republicans still don''t like it .. so let''s see if they can wittle it down .. No Way in Hell these guys deserve $700 Billion in blank checks .. evey one agrees there .. so we have the Left and Right actually working together for a change .. now that''s historical!

[david1737]

Deregulation has died!

[downtowner97]

Bush stopped blaming Clinton a few days back. Now he''s saying it''s all the next guy''s problem. There were thirty seconds between those two philosophies when Laura was having an O that he took responsibility for his own actions.

[runningralph]

I was living in Washington in the nineties and a bank officer at Washington Mutual bragged to me that they were the 8th largest bank in the US and growing fast. Turns out they were just riding on the Clinton bubble. How quickly the the big and mighty fall. Liberals pump up the volume and lead us down the path to destruction.

[txlakeside]

Private investment into bad debt? ROFLMAO!

The emperor actually has no clothes, has been naked for months and is sipping margaritas in the bahamas with his other off shore friends. They are contemplating who to rape and pillage next!

De-regulate it then bail it out when they bend us over!

It is a bend-over and not a bail-out .... except for the fat cats living high on the hog with massive tax cuts, tax shelters and tax exempt trust funds to protect them.

TAX THE RICH! LET THEM PAY FOR IT! THEY ARE THE ONES WHO BENEFITTED MOST THE LAST 8 YEARS!

GREEDY DE-REGULATING FREE MARKET BAS__RDS!

Don''t worry be happy! We will bail you out and you can do it all over again! This is just a repaet of the 80''s .... very 20 years or so we have to have a redistribution of wealth to the rich!

[cbsguest6]

I think more private investment into these bad debts is what''s really needed...

[harrymorley]

All of this recent Wall Street fiasco seems almost criminal, especially if the CEO''s of these troubled institutions keep getting their absurd wages while we the taxpayers bail them out. I am just amazed at their audacity.