Federal regulators shut down $307 billion-asset Washington Mutual Bank, the largest failure in American history, late Thursday, selling its assets and deposits to JPMorgan Chase.
While dramatic, the collapse had a unique twist. All uninsured deposits were covered, likely stemming depositor panic as a result of the closure, and the failure is not estimated to cost the Deposit Insurance Fund any money.
JPMorgan paid a $1.9 billion premium and took all of Wamu's deposits, assets and qualified financial contracts. Shareholders, subordinated and senior debt holder claims were wiped out.
"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," FDIC Chairman Sheila Bair said in a press release. "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."
The transaction also included Washington Mutual's other subsidiary, Washington Mutual FSB, in Utah.
Thursday evening's turn of events marked the finale to a dramatic downfall for the country's largest mortgage lender, and it comes at a pivotal moment for the industry, as losses mount and the government rushes to complete a $700 billion rescue plan to avert financial meltdown.
In a press release, the Office of Thrift Supervision, which closed the thrift, said pressure mounted in the last three months. Just this month, customers began withdrawing money rapidly, with deposit outflows that began on Sept. 15 totaling $16.7 billion.
There "were very severe liquidity strains that this institution was under," Bair told reporters in a conference call.
A spokesman for JPMorgan, who was also on the call, said the New York company will fold Wamu's thrift charter into its national bank charter.
Without the JPMorgan deal, the fall of Wamu could have been costly. Washington Mutual, the thrift holding company, held $309 billion in assets and $190 billion in deposits. Historically, failed banks have cost the Deposit Insurance Fund approximately 10% of their asset size.
The DIF, already 14 basis points below its statutory 1.15% ratio of reserves to insured deposits, would have been badly damaged. Banks, already facing a large premium increase when the FDIC meets to set rates next month, could have seen their assessment rates skyrocket. The JPMorgan deal, however, means Wamu's collapse will not affect the DIF, Bair said.
The end of Wamu's storied run comes as the financial markets are in a state of uncertainty. The fate of the industry rescue plan appeared unclear as lawmakers continued to try to hammer out details on an agreement late Thursday.
Stung by its losses from a portfolio of high-risk subprime mortgages, the Seattle-based thrift company had been the subject of sale rumors for months.
Reports swirled a week ago that Wamu had put itself up for auction, and its potential suitors included JPMorgan, Citigroup and Wells Fargo & Co.
JPMorgan was said about two weeks ago to be in advanced talks with Wamu. In March, numerous reports said JPMorgan was pursuing a deal then, but talks had fallen apart after a $7 billion capital infusion from TPG.
Last week, TPG said it would waive any damages the investor would have been owed if the company had pursued a sale, clearing the way for a deal to take place.
But with the Wamu acquisition, JPMorgan gets a foothold into the West Coast's deposit base at a bargain price. However, the two companies' branch networks overlap in New York and Chicago, which may force JPMorgan to divest some offices.
Wamu's troubled loan portfolio wounded badly by defaults of its heavily marketed subprime loans was the main factor in three consecutive quarters of losses, including a $3.3 billion drain last quarter. The company had predicted that total losses stemming from bad mortgages could equal $19 billion.
Last quarter, its loan losses skyrocketed 80% to $8.5 billion, and just this year its assets have fallen 5%. Meanwhile, its stock price had dropped more than 90% since August 2007, when the credit crisis began hitting the industry.
Wamu's credit rating had been downgraded by Standard & Poor's into junk territory on Wednesday. Moody's Investors Service made a similarly bleak assessment on Monday.