NEW YORK/WASHINGTON (Reuters) – Washington Mutual Inc was closed by the U.S. government in by far the largest failure of a U.S. bank, and its banking assets were sold to JPMorgan Chase & Co for $1.9 billion.
Thursday’s seizure and sale is the latest historic step in U.S. government attempts to clean up a banking industry littered with toxic mortgage debt. Negotiations over a $700 billion bailout of the entire financial system stalled in Washington on Thursday.
Washington Mutual, the largest U.S. savings and loan, has been one of the lenders hardest hit by the nation’s housing bust and credit crisis, and had already suffered from soaring mortgage losses.
Washington Mutual was shut by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. This followed $16.7 billion of deposit outflows at the Seattle-based thrift since Sept 15, the OTS said.
“With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,” the OTS said.
Customers should expect business as usual on Friday, and all depositors are fully protected, the FDIC said.
FDIC Chairman Sheila Bair said the bailout happened on Thursday night because of media leaks, and to calm customers. Usually, the FDIC takes control of failed institutions on Friday nights, giving it the weekend to go through the books and enable them to reopen smoothly the following Monday.
Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The largest previous U.S. banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.
JPMorgan said the transaction means it will now have 5,410 branches in 23 U.S. states from coast to coast, as well as the largest U.S. credit card business.
It vaults JPMorgan past Bank of America Corp to become the nation’s second-largest bank, with $2.04 trillion of assets, just behind Citigroup Inc. Bank of America will go to No. 1 once it completes its planned purchase of Merrill Lynch & Co.
The bailout also fulfills JPMorgan Chief Executive Jamie Dimon’s long-held goal of becoming a retail bank force in the western United States. It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price through a government-financed transaction.
On a conference call, Dimon said the “risk here obviously is the asset values.”
He added: “That’s what created this opportunity.”
JPMorgan expects to incur $1.5 billion of pre-tax costs, but realize an equal amount of annual savings, mostly by the end of 2010. It expects the transaction to add to earnings immediately, and increase earnings 70 cents per share by 2011.
It also plans to sell $8 billion of stock, and take a $31 billion write-down for the loans it bought, representing estimated future credit losses.
The FDIC said the acquisition does not cover claims of Washington Mutual equity, senior debt and subordinated debt holders. It also said the transaction will not affect its roughly $45.2 billion deposit insurance fund.
“Jamie Dimon is clearly feeling that he has an opportunity to grab market share, and get it at fire-sale prices,” said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. “He’s becoming an acquisition machine.”