In what I feared might become a regular feature here, the Federal Deposit Insurance Corporation (FDIC) arranged for the takeover of the 13th failed bank of 2008 Thursday. As I posted, the FDIC likes to close banks on Friday after hours so it can reopen as branches of the acquiring bank on the following Monday morning. But since this is history's biggest bank failure, the FDIC couldn't wait for the weekend. The bank in question is the $310 billion (assets) Washington Mutual (NYSE: WM).
This is history's biggest bank failure -- it's almost eight times bigger than the previous record holder, Continental Illinois. In this case, JPMorgan Chase (NYSE: JPM) was the rescuer, buying WaMu from the FDIC. This follows JPMorgan's purchase of Bear Stearns back in March in which the Federal Reserve provided a $29 billion loan. But this deal will cost JPMorgan far less -- a mere $1.9 billion, and it will write down WaMu's loan portfolio by 10% in the process. To further bolster its position, JPMorgan will raise $8 billion in capital.
What does JPMorgan get for all this? Branches for one thing -- 5,400 in 23 states -- and it will shutter 10% of the combined branches. What JPMorgan does not get is much of the junk that WaMu carried and by that I refer to "senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, any assets or liabilities of the holding company, Washington Mutual Inc.; or [WaMu's] lawsuits."
As I posted yesterday, the FDIC's fund for bailing out depositors is in danger of dropping too low if some experts are right about the number of banks that may fail in the next year. Fortunately for the FDIC, in this case it claims it will not need to use up any of that $45 billion fund because JPMorgan will in effect insure those deposits.
Meanwhile, this looks to be a win for JPMorgan shareholders. WaMu will "add 50 cents per share to JPMorgan's" 2009 earnings and it expects the deal to cost $1.5 billion in pretax dollars while achieving that same amount of pretax savings by 2010.
What should you do? Make sure your money is with a profitable bank with few brokered deposits and low loan losses. Otherwise, you could end up worrying as many WaMu depositors probably are this morning. Fortunately, it looks like JPMorgan bailed them out.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
9-26-2008 @ 9:30AM
Elayne Feinstein said...
I have a savings and checking account at WAMU. In addition, my social security check is direct deposited into my savings account. How am I affected by the recent acquisition of WAMU by JPMorgan?
9-26-2008 @ 10:20AM
alan said...
I'm pretty sure you won't be affected. You're accounts deposits everything just belong to JPMorgan Chase now. Banks will operate as normal. In time some of the branches may close but as far as you being a customer everything should be seamless. Besides you're money is being handled by a massive bank now run by a terrific CEO so you shouldn't have anything to fear.
9-26-2008 @ 11:27AM
sam said...
I was an employee with WAMU for 7 years. My accounts and mortgage are still with the bank. My family's lives have been turned upside down, while the management made millions. THey knew what they were doing the entire time and deserve to go to jail. I'm just glad my 401k had no wamu stock. I feel for those families who had their reitrement in WAMU stock.
9-27-2008 @ 11:25AM
scherf.com said...
MODERN-DAY ROBBERY by the U.S. government.
The theft/robbery of Wamu by the FDIC is worse than the recent seizures of private companies in communist Russia.
Here the FDIC comes in and disownes the shareholders of their assets and then the FDIC turns around and sells the loot to JP Morgan for $1.9 billion.
In this case the FDIC acted illegally and literally stole private property as they paid nothing, but just seized private property from their owners. It's unconstitutional and as a series of major multi-billion dollar class actions against the FDIC are under way in the Wamu robbery/theft, the taxpayers will have to foot the bill of many billions of dollars.
This theft/robbery will have severe consequences for the regulatory body involved in this modern-day communist robbery of private property.
Sheila Bair can't let this one go unaccounted for, either she has to correct this illegal transaction by paying off the shareholders and creditors with the $1.9 billion the FDIC collected, or she has to go/resign, because this is an outrage and this won't fly in a zivilized capitalistic society.