Washington Mutual Seized by Federal Deposit Insurance Corp; Sells Assets to JP Morgan Chase

JP Morgan Chase to Market $8 Billion in Common Stock to Underwrite WAMU and Bear Stearns Acquisitions

The Federal Deposit Insurance Corp. (FDIC) seized Washington Mutual on the afternoon of Thursday, September 25, and immediately sold the bulk of its assets to JP Morgan Chase. The failure of WAMU, the latest casualty of the collapse of the home mortgage market, represents the biggest bank failure in history. The savings and loan association had $310 billion in assets and $188 billion in deposits.

The next largest bank failure, historically, was a quarter century ago, when Continental Illinois National Bank collapsed in 1984. Continental Illinois had $40 billion in assets (approximately $80 billion in today's dollars). The recent failure of Pasadena, California-based IndyMac Bancorp represented only $32 billion in assets.

JP Morgan Chase, which is acquiring the WAMU assets for $1.9 billion, plans to write off $31 billion in bad loans. WAMY has a real estate loan porfolio totalling $227 billion JP Morgan Chase, which acquired the failing investment bank Bear Stearns in March for $2.4 billion, plans to bolster its capital by selling $8 billion in common stock. The deal gives JP Morgan Chase a big presence in the Western United States and vaults it past Bank of America Corp. to position it as the second largest bak in the United States, in terms of assets. It is almost equal to Citigroup, America's biggest bank.

Jamie Dimon, the chief executive officer of JPMorgan, rose through the ranks of Citigroup. Since taking over JP Morgan Chase, he has desired a greater presence on the West Coast.

WAMU's fortunes were scuttled by losses generated by its portfolio of "option" adjustable-rate mortgage (ARM) loans. As the numbers of holders of WAMU's ARM loans in default began increasing in 2007 and 2008, losses ballooned. For its second quarter 2008, WAMU reported a $3 billion loss The price of a WAMU stock during 2008 declined by 87%.

The immediate sale of WAMU means that the FDIC will not have to cover losses from the WAMU failure. Its reserves total $45.2 billion, down from $52.4 billion at the end of 2007. FDIC reserves were hit by the failure of IndyMac.

Deregulation & The Economy