Washington Mutual Falls To Subprime Mess

Government Seizes Nation's Largest Thrift Bank, Sells Major Portion To JPMorgan Chase

(CBS/ AP)  As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks - Washington Mutual Inc. - has collapsed under the weight of its enormous bad bets on the mortgage market.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.

One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.

The money that banks lend to each other is the oil that keeps the economy moving - but suddenly the cost of that oil is skyrocketing, reports CBS News correspondent Anthony Mason. The interest rate banks charge each other has spiked a full point in the past two weeks and more than half of all adjustable rate mortgages are tied to that rate. And an indicator that banks use to chart risk has soared to its highest level in more than 20 years.

"So the system's just frozen. And that has ramifications for everyone - anyone who's trying to get an auto loan, anyone who's trying to get a credit card," Credit Suisse's Ira Jersey told Mason.

Because of WaMu's souring mortgages and other risky debt, JPMorgan plans to write down WaMu's loan portfolio by about $31 billion - a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.

"We're in favor of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.

WaMu is JPMorgan Chase's second acquisition this year of a major financial institution hobbled by losing bets on mortgages. In March, JPMorgan bought the investment bank Bear Stearns Cos. for about $1.4 billion, plus another $900 million in stock ahead of the deal to secure it.

JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world's largest insurer, getting taken over by the government.

JPMorgan also said Thursday it plans to sell $8 billion in common stock to raise capital.

The downfall of WaMu has been widely anticipated for some time because of the company's heavy mortgage-related losses. As investors grew nervous about the bank's health, its stock price plummeted 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.

WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.

The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which gave WaMu a cash infusion totaling $7 billion this spring, on the sidelines empty handed.

WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then 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. Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank, replaced Killinger earlier this month.

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.

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. Over the last three quarters, it added $10.9 billion to its loan-loss provisions.

JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company.

JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states, and that it plans to close less than 10 percent of the two companies' branches. The deal also gives JPMorgan Chase a stronger presence in the western part of the United States, reports CBS News correspondent Michelle Gielan.

The WaMu acquisition would add 50 cents per share to JPMorgan's earnings in 2009, the bank said, adding that it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.

"This is a definite win for JPMorgan," said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the $31 billion writedown to WaMu's portfolio.

[spiritwalk]

This is the biggest single bank failure in US history and what is amazing is that from personal experience I strongly suspect that this is not a failure due to "subprime mess", but stupidity.

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.

[navyretired2]

These *** CEOs need to be held accountable and go to prison. I don''t care what it gets blamed on...you can always guarantee the CEO was an over-greedy risk-taker that caught the backfire, but gets to escape with multi-million in packages/incentives.

[spiritwalk]

I was not saying that the big guys at the top should not be held responsible, I am just saying that WaMu appears to have been managed with incompetence that people are going to find hard to believe.

If you think about it, on a simple level, if money is stolen then to straighten the situation out you replace the money and things get back up and running.
But, if the money has not been properly filed, credited to the wrong accounts and such then the forensic accountants are going to have a nightmare of a time figuring out what is going on.

I am sure that is what happened to the motgage of the people I know. Somebody made a bookkeeping error and when confronted about it they couldn''t figure it out. Let''s face it, if they send out a new credit card with an expired date then their system must be so screwed up it is almost beyond comprehension.

I hope this is only greed and corruption because that will be easier to fix. If it is management and bookkeeping incompetence than the problems are only just beginning.

[omega40]

Posted by spiritwalk

Spiritwalk, I banked for years with Wamu and until last night, never had an issue with them.

[gop_will_win]

WM is 16 cents right now. Yahoo Finance WM board is a good read.

[tbuckl]

I thinking of fireworks, I hate the American banking system, delighted it falling apart. 21 Century Rome is coming down. My Governement is going to print money they don''t have, they are going to fake it a little longer. Thank you Bush you have really screwed American up, please let the door hit you on the way out. I didn''t vote for Bush and now you all see why.

[emelder]

CBS: Please fight for more transparency with this kind of transaction. Why JP Morgan? Were other banks bidding on this take-over business? Why is TPG capital left holding an empty bag? Just WHO is making the decisions here ... any public scrutiny or regulation being by-passed. WE DON''T TRUST ANYONE RIGHT NOW. Please do a story and see how decisions are being made ... and see if JP Morgan has used political or financial leverage to get this business. Thank you.

[spiritwalk]

omega40 -- I am not questioning you or anyone banking with WaMu and not having any problems. What I am saying is that it appears that when there were problems, problems that should have been corrected easily, something went wrong.
If a lender gets a payment, as in the mortagage case I exampled and the payee produces the cancelled check there should not be an argument about it that goes on for months. As I understand it, this was not so much an argument as it was the WaMu representatives just refusing to deal with it.
In my case it was my saying to them "This new card says it expires August of 2008" and them responding "So what''s the problem?".
If you had no problem with your WaMu account then I can understand why you might find this incredible, but that is what happened.
I found it incredible. After 2 or 3 times talking to them about how August 2008 having already passed and them saying they didn''t understand what I was talking about, I started started doubting myself. But, this is September 2008 and August 2008 is gone and not coming again.
The WaMu reps I was dealing with could not have been that dense. They knew things were wrong and that mistakes were being made, but the were in a denial mode and they weren''t going to deal with it. They had their fingers in theri ears and shouting "I can''t hear you, I can''t hear you!"

[rights4all]

Wamu failed because the good assets were seized by FDIC and sold at firesale price to JP Morgan.
But the govt will used that failure as an excuse to push Congress to accept the $700B plan eventhough it was the one that hastened the downfall of Wamu.
Wamu is one example where money from the $700B bailout would have been wasted. It would only postpone the inevitable.
The govt thinks those delinquent mortgages are worth something, which is the basis of the bailout plan. Just look at Wamu. The stock will probably trade at a few cents each today, eventhough the company still have those mortgages on its book. The bank has to pay increasingly higher rate for the mortgage default insurance that caused it to spiral to its death. The final blow came from FDIC. Maybe the govt should look at the alternative Republican plan about providing the mortgage insurance instead of buying those junk mortgages at inflated price and taxpayers get stuck with the bag.
Alternatively, the govt must take huge equity share in the companies. That is the only way to be sure to recoup the money.

[whitemale08]

This is ridiculous, then Hank the Snake Paulson from Goldman Smacks, lets JP Morgan transform from a investment bank (gambling casion) into a commercial bank (safe bank) to gobble up all of the deposits to prop up its failure.

What a joke.

STOP THIS NONSENSE AND STOP THE D*** BAILOUTS!!!!

THESE GUYS ON WALL STREET ARE SWINDLERS!!!!!!!

[whitemale08]

Hank the Snake Paulson from Goldman Sucks will allow his buddies at JP Morgan take advantage of "bankruptcy first" for WaMu but won''t let Congress to do the same for the failed financial banks.

What a joke.
CAN''T YOU SEE THIS ALL A SCAM??????

STOP THE DA** BAILOUTS NOW!!!!!!!

[spiritwalk]

Wamu failed because the good assets were seized by FDIC and sold at firesale price to JP Morgan.
Posted by rights4all

That is no what happened. It has been known that WaMu has been failing for months and there has been a multitude of stories about going back to last spring.
WaMu''s failure was expected. It was Lehman and AIG that were not really expected.
Your statement implies that WaMu failed because Morgan took over. That is reverse logic. You get wet when it rains, it does not rain because you are wet.

[flreason]

Another fallout of Republican deregulation. I can remember when they passed the bill that allowed interstate banks. The result was inevitable. The more centralized and concentrated bank assets are, the more they are vulnerable and subject to mismanagement.

[jennasmith2]

looks like the "fear machine" is up and running at full speed!

[spiritwalk]

flreason--You bring up an interesting subject and it makes a good point as to why we should not rush into allowing politicians to make hasty agreements to deal with the public''s immediate fears.
The concept of interstate banking oes back to the beginning of the 20th century. The banks wanted it, but congress would let them do it.
Come the 1930''s you had people like Bonnie & Clyde, John Dillinger, et al, robbing banks. At the time, as they were state banks, you could rob a bank in Missouri and take off to Kansas. Once you got over the border the Missouri cops had to stop chasing you and the Kansas cops couldn''t arrest you automatically because you had robbed a Missouri bank.
The bankers saw this and got the newspapers to play this up big. They then used the public outcry to force congress to make the banks "federal" so that supposedly the FBI could chase bank robbers from state to state. What the change actually accomplished was to let the banks have the interstate dealing they wanted.
So, we should not let congress rush to "fix" what is wrong in this crisis without examining the "other reasons" that the banking institutions might have for wanting these changes.
You know perfectly well that there are people right now figuring out ways to turn this crisis to their advantage.

[spiritwalk]

I am so glad that the Republicans are more than willing to have us all relive the carefree days of the Great Depression. Thanks.

Posted by koko98 at
--------------------------------------------------------------------------------

What is that supposed to mean?

There is a crisis going on. A financial institution based and manipulated crisis. Financail giants are pulling the strings of panicing politicians, right before the election, hoping to get them make hasty decisions to satisfy the panicing voters.
Working with the bankers are blogers, like you who come up with crazy nonsensical statements about Republican this and Democrat that, "Obama is a Muslim", "Palin is afraid of witchcraft"; while the banks get congreess to give them the legislation and power they want.
Any con artist will tell you that the secret to running a con is to distract the mark while you set them up. They keep you thinking that you are the clever one and you think you are so clever that you have beat them while they make the getaway with your money.

[spiritwalk]

The Republicans are fiddling while Rome burns. How patriotic.
Posted by koko98

------------------------------------------------------

You prove my point. For you the Republicans are fiddling while Rome burns. Someone else thinks the Democrats are fiddling.
While you are playing this game the people who are setting the fires are just lighting more fires and profitting from the blaze. Anytime someone starts looking at them and wonders what they are doing with the matches they distract you with some other silly issue. If you ask what they are doing with that torch they point at someone else and start going on about how that guy isn''t wearing an American flag on his lapel. Then you go running off and let them alone to set another fire.
If you don''t think there is anything suspicious that this whole crisis came up just as the election closed in then I will never make you see that manipulated partisan bickering is being fueled just to distract you.

[spiritwalk]

By the way koko98 you wrote:

"While Mr. Spirit sees conspiracies..."

What I did I post that made you conclude that I was a "Mr" and not a "Ms"? I see nothing to indicate that anymore than I see anything to justify your conclusion that I am a Republican.

Again my point, emotional manipulation of people''s prejudices and fears lead to them to coming to conclusions that the facts do not support.

That is how the banks and the investment corporations are manipulating this crisis. Take any group of people, turn them into 2 prejudiced and fearful mobs fighting each other and they will forget about you while you rob both their houses.

[spiritwalk]

"the climb the deeper the fall"
"October is traditionally the worst month of the year for the stock market."

Pithy proverbs always sound good when applied to any discussion. It reminds me of a con job I know of one person getting caught in.
There was a little Mom & Pop store in the neighborhood. I went in one day and the owner was beside himslf with anger.
He told me he had just been conned into buying 3 cases of "Charmin" he didn''t need. He had told the salesman he didn''t need any as he had plenty of toilet paper in the back. The salesman said "You had better stock up though. Remember, the summer is coming."
The saleman instilled fear in the store owner with a clever line. A fear that he would not have the toilet paper he would need because people always c**p more in the summer.
That is the same c**p the bankers are selling now to congress and the voters to get them into panicing and coming up with new banking regulations.

[cbssmurf76]

Deserves Wamu right! I have been a long time Wamu customer, always taken excellent care of my credit, payments, etc. In fact, I was always a model client. However, this summer, they decided to take advantage my good standing. My credit card with them had a 9% APR, the next month it jumped to 14%, the following month 21% & now currently it stands at 28%. I was never late, I always paid more than the minimum, & I stayed within my credit limit. My other credit cards/banks rewarded me for my efforts, but not Wamu. When I asked them why they were jacking my rate, they couldn''t give me an explanation other than that they couldn''t lower it. So, since they wanted to screw me over, I did the same to them. I transfered my entire balance to a new card with 0% APR & cut my card. I poured salt in the wound by rubbing it in their face that they wouldn''t make a dime off of me anymore, which I know was childish, but I should have had to pay for their mistakes. I took care of my business, why weren''t they?

[eyetosee]

We Sold off The Standards Long ago so way be supprised NOW!

[dakotaclark]

Hmmm...

The real culprits in this mess are some of the real estate and mortgage businesses. In their chase to close deals and make big $$$$$ commissions, real estate professionals, suggested certain lenders to their unsophisticated buyers.

Then, mortgage professionals, shoved or jammed these buyers/borrowers into loans that did not benefit the borrower.

In many cases, real estate and mortgage folks made big commissions, by fleecing the buyers.

In general, the crappier the loan to the buyers, the higher the commissions to the mortgage folks. Loans notable for this were the very low start rate adjustable rate mortgages.

The mortgage business failures are not the fault of people who were desperately seeking home ownership. Rather, the fault lies directly with the greedy real estate and mortgage folks.

It is routine for mortgage folks to earn as much as $5,000 to $8,000 or more, per $200,000 loan, by carefully adjusting and massaging the rates and points.

There ought to be a law. Maybe now with the collapse of mortgage%u2013backed securities, there will be stronger laws to regulate the real estate and lending businesses.

[spiritwalk]

poured salt in the wound by rubbing it in their face that they wouldn''''t make a dime off of me anymore, which I know was childish, but I should have had to pay for their mistakes. I took care of my business, why weren''''t they?
Posted by CBSSmurf76 at 04:05 PM : Sep 26, 2008
-------------------------------------------------

I was more childish than that. I told them (the rep herself) that everyone knew that WaMu was in trouble and when they did fall you could comfort herself with the thought that she had done her best to make my life and all the customers like me miserable being petty for a bosses that would put her on the street while they saved themselves.
Isn''t karma beautiful?

[Michael Arnold]

Let''em (all) die and die quickly,the better off we''ll be. Unfortunately, if this bailout happens, its gonna get a lot worse. A LOT worse. Washington will have zero creditability.

[drivelphobe]

I had an acquaintance in the mortgage business over the past 5-6 years who bragged about his money, bought every toy with reckless abandon, and scoffed at my suggestion to save and prepare for the inevitable cycles of his business. He told me his secret to making so much money was to get borrowers referred by friends working in major banks who had been turned down, and he would get them loans through his contacts.

Good news is he lost everything during the past year, and is starting over, bankrupt. Sad for his three children who thought life was terrific until now.

I say no to any bail out and let the chips fall where they may.

[oly_joe]

Accordiong to a CNN Poll a few days ago, about 80% think Republicans are to blame for the economic mess .. Obamas favorable Poll numbers reflect this fact!

[cjs_cnet_xyz]

This bailout stinker will be passed in less than three weeks. The burden will be placed on the middle class and the government will do little more than pay lip services to all the CEOs who scurried out with golden parachutes. When is the last time that the government passed a tax on the rich that took effect so quickly? Privatizing profit while publicizing debt is no way to run a government. The middle class is going to mistrust this government for decades for not protecting its financial interests. It is too early to tell if a revolution is on the horizon, but it is clear that if the public cannot punish and make an example of those that undermined financial security that those legislated the insecurities will lose their jobs.

[closethippy1]

A few years ago I used to work for a corporation and so one day I''m walking down the aisle in one of our big offices and I see one of the guys from the Board of Directors and I smiled and said "Hi, how you doin'' this beautiful morning?"
He stops and stares at me for a moment and then says something like, "Listen, we have over 1200 employees in our corporation and you can''t expect me to talk to everyone of them. If you got something to say to me you''re supposed to talk to the office manager. It''s in the employee manual, isn''t it?"
And I''m thinking to myself, "Am I going to get fired for saying "hi"?
"Isn''t it?!"
"Oh, yes, sir it is. I''m sorry."
And he walked away.
It''s amazing how many corporate folks are so full of themseves. No wonder they think they can get away with anything and don''t want to hear what others are saying.
I hope that with this sub-prime mess they are reminded the sun doesn''t revolve around them.

[praiseallah1]

Don''t Let Bush bailout Wall Street with $700 Billion in Tax Payer money!

Email your States Senators, Congressperson, House Representatives and DEMAND that they vote NO on any Bailout because this money will just be used to pay off Wall Streets debt that they created themselves through their own greed by marketing bundled bad mortgage loans!

We have also sent sorning emails to George Bush, Nancy Pelosi, Harry Reid, Chris Dodd, Barney Frank, McCain, Obama saying we will vote them OUT of Office.

Watch this video which show which lawmakers are responsible for the sub-prime mortgage mess at http://wallstreetmarketnews.blogspot.com/2008/09/who-is-to-blame-for-wall-streets-700.html

[nicholasma]

NO! No bailout, I never got the chance to own a 500,000.00 house and *** my way to that kind of loan!

Please tell me... 700 b in bad loans this years means what ??? in 4 years their still bad loans !! let then eat there loans. Dot tell me to eat cake!

[gwjackie]

GOOD GOOD GOOD LET THE SOB,S GO TO HELL

[gwjackie]

EVERONE HAD BETTER GET THER MONEY OUT BY WEEKS END OR YOU WILL NOT GET IT!!!!!!!!!!!!!

[gwjackie]

tHE PERSON THAT LOST EVERYTHING IN THE PAST YEAR IT IS VERY SAD FOR HIS KIDS BUT HE SHOULD HAVE TO LIVE IN A CARDBOARD BOX FOR A COUPLE OF YEARS BEFORE HE CAN GET A WOODEN ONE ABOUT 8X10 IS BIG ENOUGH.

[gwjackie]

I think the republicans are 95% to blame for this.

[tbuckl]

Thomas Jefferson was so right when he said the following, I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by all future generations, under the name of funding, is but swindling the state of being yet to come on a large scale. Now the American banking system and its Barbaric CEOs have taken the American people to the clearers. Thomas Jefferson correctly used the word SWINDLING when writing his thoughts about banks and aristocratic tyrants that would infect our soceity. He knew these aristocratic tyrants would infest our soceity just like they did so many centuries ago. I wish he had been wrong, because I am starting to think something else he said may also be true. "The tree of liberty must from time to time be refreshed with the blood of patriots and tyrants. It is its natural manure."