SEPTEMBER 26, 2008
J.P. Morgan to Take Over Faltering WaMu
U.S. Government Helps Broker a Deal to Dispose of Huge Thrift; Banking Giant Expected to Get Deposits, Branches

By ROBIN SIDEL, DAVID ENRICH and DAN FITZPATRICK

In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co.

Associated Press
Pedestrians walk past a Washington Mutual branch in downtown Seattle.
The closing represents the demise of what once was the largest U.S. thrift but came to symbolize many of the worst excesses of the mortgage boom. Federal regulators said WaMu has suffered an exodus of $16.7 billion in deposits since Sept. 15, leaving the Seattle thrift "with insufficient liquidity to meet its obligations." As a result, WaMu was in "an unsafe and unsound condition to transact business," according to the Office of Thrift Supervision.

While the exact structure of the transaction wasn't immediately known, J.P. Morgan is expected to acquire Washington Mutual's deposits and branches, as well as other operations. The deal isn't expected to result in any hit to the Federal Deposit Insurance Corp.'s bank-insurance fund, according to a person familiar with the arrangement. But it's likely that another arm of government would have to pick up the tab. Some analysts have worried that a WaMu failure could cost more than $20 billion.

Federal regulators have been heavily involved in orchestrating the transaction, which comes as WaMu grapples with its bad mortgage loans. Regulators were hoping to fend off a collapse of WaMu, which, with more than $300 billion in assets, would mark by far the largest banking failure in U.S. history.

Under the deal, New York-based J.P. Morgan, which has long coveted WaMu as a way to secure a footprint on the West Coast, will assume most of the thrift's deposits and branches, as well as some other operations.

Unlike many of the 12 bank failures that the FDIC has overseen this year, the J.P. Morgan-WaMu transaction isn't expected to impact the agency's national deposit-insurance fund. It wasn't immediately clear how the transaction would be structured to avoid the insurance fund taking a hit.

With mortgage losses mounting, and its stock price plunging, WaMu has been scrambling over the past month to find a solution; last week it put itself on the auction block. A number of banks -- including Citigroup Inc., Wells Fargo & Co. and Banco Santander SA -- pored over WaMu's books, but the bank didn't receive any offers. This week, WaMu's outside bankers approached a group of private-equity funds to gauge their interest in a deal, but that was viewed as a last-ditch effort.

Also this week, the FDIC took the step of reaching out to banks, asking them to express interest in taking over some or all of WaMu, according to people familiar with the matter. Those bids were due at 6 p.m. Wednesday. J.P. Morgan's takeover of WaMu's deposits represents a huge blow for private-equity firm TPG, which injected $7 billion into the thrift this spring. The transaction is expected to wipe out WaMu stockholders and holders of the company's senior debt, one person said. A key unknown: the fate of WaMu's bad assets, which include mortgage loans that have soured as housing markets tanked.

Arranging the deal in a way that doesn't cost the FDIC's deposit insurance fund any money would be an achievement for Chairman Sheila Bair, who has had a hawkish view about the state of many financial institutions. Federal regulators faced criticism from many after the July failure of IndyMac Bank, which the FDIC estimated might have cost the deposit insurance fund close to $9 billion.

This is the second time the government has gone to J.P. Morgan as a buyer of last resort. In March, the government agreed to backstop J.P. Morgan's takeover of Bear Stearns.

This will likely prompt criticism from rivals about preferential treatment. Bank of America Corp., for instance, didn't receive government assistance in its recently announced purchase of Merrill Lynch. Of course, in the case of WaMu, there were presumably other bidders who simply wouldn't offer that much for the deposits and branches.

Before the deal, J.P. Morgan ranked as the fourth-largest bank as measured by branches, ranking below Bank of America, Wachovia Corp. and Wells Fargo. Its network of more than 3,100 branches stretches across 17 states with deep penetration in New York, Illinois, Texas, Michigan and Ohio.