Federal Regulators Seize WaMu, Sell Assets to JPMorgan For $1.9 Billion

Alan Fishman’s rein as CEO of Washington Mutual - a position he inherited on Sept. 8, along with a $7.5 million signing bonus and a $1 million salary - was short lived. Late Thursday evening, Sept. 25, federal regulators seized the nation’s largest savings and loan and quickly orchestrated a deal to sell the bulk of the troubled bank’s assets to JPMorgan Chase for $1.9 billion. It is the biggest bank failure ever in United States history and the 13th bank failure so far this year.

WaMu’s descent this year has been swift. The Seattle-based institution was a major originator of subprime and other risky residential mortgages. Of the $182 billion in single-family mortgages that WaMu had on its books as of June 30, nearly $53 billion were optional adjustable-rate mortgage (ARMs) - a flashy and potentially dangerous loan option that allows borrowers to pay less in the beginning of their mortgage followed by payments that can increase dramatically if interest rates go up during the loan’s tenure. In addition to the ARMs, nearly $17 billion of WaMu’s loans were subprime mortgages.

After becoming increasingly burdened from massive mortgage and credit card losses, WaMu’s shares lost nearly 90% of their value this year. On Sept. 8, Washington Mutual fired its CEO Kerry Killinger, replacing him with Fishman. By June 30, following credit rating downgrades to junk status, the bank had posted $6.1 billion in losses.

In taking over Washington Mutual, JPMorgan will pay the government $1.9 billion, and assume WaMu’s loan portfolio of $307 billion in assets. In total, JPMorgan is expected to write down approximately $31 billion of bad loans and raise some $8 billion in new capital.

As for shareholders and some bondholders, the deal means they will be wiped out. JPMorgan will not acquire any of WaMu’s liabilities nor claims by shareholders and senior debt and subordinated bond holders. WaMu’s customers’ deposits will be secure, however, according to federal regulators.

WaMu’s final curtain call and 119-year existence as an independent company came much like the scene depicted in the 1946 film, It’s a Wonderful Life, in which a run on the bank nearly forced the collapse of the fictional Building & Loan. In the end, of course, the Building & Loan survives. Sadly for Washington Mutual, real life was not so kind. In the past 10 days, depositors had withdrawn nearly $17 billion of their money, signaling a potential collapse that would have been devastating on the Federal Deposit Insurance Corp.’s insurance fund.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

This entry was posted on Friday, September 26th, 2008 at 1:18 pmand is filed under JP Morgan Chase, Washington Mutual. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.