Government Seizes WaMu and Sells Some Assets
by: Eric Dash and Andrew Ross Sorkin
The New York Times

Washington Mutual, the giant lender that came to symbolize
the excesses of the mortgage boom, was seized by federal
regulators on Thursday night, in what is by far the largest
bank failure in American history.

Regulators simultaneously brokered an emergency sale of
virtually all of Washington Mutual, the nation’s largest
savings and loan, to JPMorgan Chase for $1.9 billion,
averting another potentially huge taxpayer bill for the
rescue of a failing institution.

The move came as lawmakers reached a stalemate over the
passage of a $700 billion bailout fund designed to help
ailing banks, and removed one of America’s most troubled
banks from the financial landscape.

Customers of WaMu, based in Seattle, are unlikely to be
affected, although shareholders and some bondholders will
be wiped out. WaMu account holders are guaranteed by the
Federal Deposit Insurance Corporation up to $100,000, and
additional deposits will be backed by JPMorgan Chase.

By taking on all of WaMu’s troubled mortgages and credit
card loans, JPMorgan Chase will absorb at least $31 billion
in losses that would normally have fallen to the F.D.I.C.

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JPMorgan Chase, which acquired Bear Stearns only six months
ago in another shotgun deal brokered by the government, is
to take control Friday of all of WaMu’s deposits and bank
branches, creating a nationwide retail franchise that
rivals only Bank of America. But JPMorgan will also take
on Washington Mutual’s big portfolio of troubled assets,
and plans to shut down at least 10 percent of the combined
company’s 5,400 branches in markets like New York and
Chicago, where they compete. The bank also plans to raise
an additional $8 billion by issuing common stock on Friday
to pay for the deal.

Washington Mutual, with $307 billion in assets, is by far
the biggest bank failure in history, eclipsing the 1984
failure of Continental Illinois National Bank and Trust
in Chicago, an event that presaged the savings and loan
crisis. IndyMac, which was seized by regulators in July,
was one-tenth the size of WaMu.

But fears of the fallout from the government takeover of
a big bank were balanced with the removal of one of the
largest remaining clouds looming over the banking industry.

“This institution was a big question mark about the health
of the deposit fund,” Sheila C. Bair, the chairwoman of
the F.D.I.C., said on a conference call Thursday. “It was
unique in its size and exposure to higher risk mortgages
and the distressed housing market. This is the big one
that everybody was worried about.” She said that the
bank’s rapidly deteriorating condition prompted regulators
to seize it Thursday, and not on a Friday as is typical
for bank closures.

For weeks, the Federal Reserve and the Treasury Department
were nervous about the fate of WaMu, among the worst-hit
by the housing crisis, and pressed hard for the bank to
sell itself. Washington Mutual publicly insisted that it
could remain independent, but the giant thrift had quietly
hired Goldman Sachs about two weeks ago to identify
potential bidders. But nobody could make the numbers work
and several deadlines passed without anyone submitting
bid.

But as panic gripped financial markets last week after the
collapse of Lehman Brothers, WaMu customers started with-
drawing their deposits. The government then stepped up
its efforts, at points going behind WaMu’s back to work
privately with four potential bidders on a deal. On
Wednesday afternoon, the government solicited formal
written bids. On Thursday morning, regulators notified
James Dimon, chairman and chief executive of JPMorgan
Chase, that he was the likely winner.

“We are building a company,” Mr. Dimon said in a brief
interview. “We are kind of lucky to have this opportunity
to do this. We always had our eye on it.”

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But the seizure and the deal with JPMorgan came as a shock
to Washington Mutual’s board, which was kept completely
in the dark: the company’s new chief executive, Alan H.
Fishman, was in midair, flying from New York to Seattle at
the time the deal was finally brokered, according to people
briefed on the situation. Mr. Fishman, who has been on
the job for less than three weeks, is eligible for $11.6
million in cash severance and will get to keep his $7.5
million signing bonus, according to an analysis by James
F. Reda and Associates. WaMu was not immediately available
for comment.

The government has dealt with troubled financial
institutions differently. Lehman Brothers and Washington
Mutual, which were less entangled with the rest of the
financial system, were allowed to collapse. But the
government took emergency measures to stabilize Goldman
Sachs, Morgan Stanley and the American International
Group, the insurance giant.

Federal regulators had been trying to broker a deal for
Washington Mutual because a takeover by the F.D.I.C. 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
after suffering a loss from the sudden collapse of IndyMac
Bank. Analysts say that a failure of Washington Mutual
would have cost the fund as much as $30 billion or more.

The deal will end WaMu’s 119-year run as an independent
company and give JPMorgan Chase branches in California and
other markets where it does not have a big presence.

Until recently, Washington Mutual was one of Wall Street’s
strongest performers. It reaped big profits quarter after
quarter as its then chief executive, Kerry K. Killinger,
enlarged its presence by buying banks on both coasts and
ramping up mortgage lending.

His goal was to transform what was once a sleepy Seattle
thrift into the “Wal-Mart of Banking,” which would cater
to lower- and middle-class consumers that other banks
deemed too risky. It offered complex mortgages and credit
cards whose terms made it easy for the least creditworthy
borrowers to get financing, a strategy the bank extended
in big cities, including Chicago, New York and Los Angeles.
With this grand plan, Mr. Killinger built Washington Mutual
into the sixth-largest bank in the United States.

But underneath the hood, the bank’s machinery was failing.

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Then the housing market began to crumble. Like so many
other financial institutions, the bank tried to hedge its
mortgage bets – but did so poorly. It retrenched on its
branch-building ambitions. But none of that was enough to
deflate ballooning losses on mortgage loans, nor defuse
ticking time bombs like interest-only and pay-option
amortization products that had reeled in bottom-grade
borrowers.

With rising mortgage payments and higher gas and food
bills, WaMu’s losses in its big credit card loan portfolio
also surged.

By then, however, WaMu’s troubles had set off alarm bells
on Wall Street, which ground its share price down daily.

With options narrowing, WaMu frantically reached out to
several banks and big private equity firms, including the
Carlyle Group and the Blackstone Group.

In March, JPMorgan Chase saw an opportunity and urged WaMu
in a letter to consider a quick deal. On the same weekend
that Mr. Dimon negotiated his daring takeover of Bear
Stearns, he secretly dispatched members of his team to
Seattle to meet with WaMu executives. When JPMorgan Chase
offered WaMu $8 a share, largely in stock. But Mr. Killinger
balked at the deal.

In April, David Bonderman, a founder of the TPG private
equity firm, and a group of institutional investors agreed
to infuse $7 billion of capital into the bank. Mr. Killinger
kept his job, and Mr. Bonderman, who had served as a WaMu
director from 1997 to 2002, returned with a board seat and
176 million WaMu shares priced at about $8.75 each – steep
discount of more than 25 percent to that day’s share price.

While the deal was sweet for Mr. Bonderman, it eroded the
value for existing shareholders, enraging them. They moved
on June 2 to strip Mr. Killinger of his chairmanship. Mr.
Bonderman, meanwhile, watched his golden bet turn to dross.
In a statement Thursday, TPG said: “Obviously, we are
dissatisfied with the loss to our partners from our
investment in Washington Mutual.”