In the biggest bank failure in U.S. history, Washington Mutual Bank was seized late Thursday by federal regulators and immediately sold to JPMorgan Chase & Co. for $1.9 billion.
Customer deposits will be secure, regulators said, but shareholders of the nation's largest savings and loan will see what's left of their holdings wiped out. WaMu shares have lost 88% of their value this year amid huge losses in the bank's mortgage loan and credit card businesses.
Although not unexpected, the failure is the latest in a series of collapses that have shaken the financial world and may add new urgency to efforts by Congress and the Bush administration on a $700-billion financial sector bailout plan.
Federal regulators said the seizure was prompted by growing concerns over the viability of WaMu, which has nearly one-third of its more than 2,200 branches in California.
Nervous depositors had withdrawn $16.5 billion of their money in the last 10 days, and a full collapse could have devastated the federal banking insurance fund, regulators said.
"I was worried," said Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. "We needed to protect the depositors and the taxpayers."
With the government-brokered sale to JPMorgan, however, depositors will have full access to their money, she said, even the funds that weren't fully insured. JPMorgan, meanwhile, will get the West Coast foothold it had long coveted.
"It will be a seamless transition," Bair said. "There will be no interruption in services and bank customers should expect business as usual come Friday morning."
The "run on the bank" phenomenon that hammered WaMu followed a similar outflow at IndyMac Bank, which was taken over by federal regulators in July even as the Pasadena bank was trying to find a buyer for itself.
Both were brought down by the kind of lending practices that now jeopardize the global financial system -- including granting mortgages to borrowers without demanding sufficient collateral or proof of their ability to make payments. As housing prices have tumbled, many of these borrowers have defaulted on the loans.
Before the mortgage meltdown, WaMu was a major originator of subprime and other risky loans. Of the $181.5 billion in home mortgages that WaMu had on its books as of June 30, $52.9 billion were adjustable-rate loans in which borrowers had an option to make lower payments, but exercising that option also put them in deeper debt and, many believe, more likely to default.
Of the rest, $16.1 billion were subprime loans to the riskiest borrowers.
With assets of $307 billion and deposits of $188 billion, the thrift is by far the largest bank to fail in U.S. history. The record had been held by Continental Illinois National Bank and Trust of Chicago, which had $40 billion in assets when it failed in 1984 -- about $84 billion in today's dollars, according to a Bureau of Labor Statistics calculator.
The sale means the FDIC, facing an expected rash of bank failures in the midst of the biggest financial crisis since the 1930s, won't have to drain its $45-billion insurance fund to cover losses from Washington Mutual.
Bair said JPMorgan won an auction among four banks bidding for Washington Mutual on Wednesday. The thrift's main regulator, the U.S. Office of Thrift Supervision, had planned to declare Washington Mutual unsound on Friday, the normal day for bank closures, and turn it over to the FDIC for disposition, Bair said, but news of the failure had begun to leak out, so the action was moved up a day.
The transaction will make JPMorgan the No. 1 U.S. bank by deposits, with more than $900 billion. Bank of America Corp. will be No. 2, with $785 billion.
JPMorgan has long been considered the most likely buyer for Washington Mutual. It had offered to buy the Seattle-based thrift in the spring, but WaMu instead accepted a $7-billion private equity investment from TPG, the former Texas Pacific Group.
WaMu put itself up for sale this month after its board ousted CEO Kerry Killinger. The need to strike a deal became more urgent in recent days as the company's debt was downgraded to deep-junk levels and its stock plunged anew.
It was unclear if JPMorgan would be able to sell troubled Washington Mutual loans to the federal government as part of a $700-billion bailout proposed by the Bush administration. In a telephone conference, Bair and JPMorgan spokesman Tom Kelly said Washington Mutual was in such bad shape that the news of the bailout didn't factor into the deal.
Bair praised JPMorgan Chase and its chairman, Jamie Dimon, for helping the government stabilize the country's shaken financial system. She also praised Warren Buffett for doing the same by investing $5 billion in Wall Street giant Goldman Sachs this week.
For JPMorgan, this is the second government-sponsored rescue. With the Federal Reserve's aid, Dimon agreed in March to absorb Wall Street's Bear Stearns Cos., the first in a series of "too big to fail" deals that have included government takeovers of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group.
Bair said "a number of regulators" had prodded Washington Mutual into raising capital in March, a process that resulted in the private equity investment.
After IndyMac failed in July, "there was another liquidity situation" -- a huge outflow of deposits at WaMu -- "that revived discussions," she said.
As customers and investors became more aware of WaMu's exposure to losses, they accelerated their withdrawals and sales of the company's stock, which closed at $1.69 on Thursday, down 57 cents on the day.
Kar Chin of East Los Angeles said he withdrew $20,000 from a WaMu branch in the City of Industry late last week even though he knew the funds were FDIC-insured because they were less than $100,000. He said friends had advised him to take his money out on the possibility that he might lose access to them temporarily, so he opened an account at Wells Fargo & Co. instead.
Chin said he stood in line for more than half an hour, mostly because of other people making withdrawals, then heard the teller talking to a supervisor about customers losing faith in WaMu.
Richard Dunne, 56, a 15-year Washington Mutual customer, said Thursday he had withdrawn nearly his entire business account from the Laguna Hills branch the week before on the advice of financial advisors, even though his account did not exceed federal insurance limits.
"Any interruption would cause real problems in my life," said Dunne, who sells women's accessories.
At a WaMu office in downtown Los Angeles on Thursday evening, 33-year-old Mike Nelson was an exception to the trend of recent days: He was depositing money.
"I'm not taking all my money out and putting it in a mattress just yet," Nelson said. "It's freaky times right now, but at the same time, things always find a way to work out -- they have to."
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Total assets: $307 billion*
Branches: 2,239 in 15 states, including about 700 in California
Losses: $6.1 billion in the three quarters ending June 30
* As of June 30