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.

[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."

[gwjackie]

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

[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]

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

[gwjackie]

GOOD GOOD GOOD LET THE SOB,S GO TO HELL

[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!

[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

[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.

[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.

[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!

[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.

[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.

[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
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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?

[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.

[eyetosee]

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

[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?

[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.

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

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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]

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
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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.