Scary as the national economy is, last Thursday's failure of Washington Mutual shows just how much more sophisticated consumers have become since the Great Depression.
With Seattle-based WaMu's collapse, the Pacific Northwest attains the unfortunate distinction of being home to the largest bank implosion in U.S. history. Decades ago this might have precipitated a full-scale run on our region's banks and a destructive stock market panic. That it has not done so demonstrates that most people understand a stampede for the exits is in nobody's best interest.
Is this confidence justified? At least in part, it is.
Deposit insurance now means bank failures aren't likely to steal the life savings of ordinary citizens. This guarantee isn't quite as ironclad as our government would have us believe. A few more giant bank collapses could put a heavy onus on Congress to keep the insurance fund solvent. But this assurance that our deposits are safe is about as sure as anything can be in this strange new world.
Regulators are now deeply involved in monitoring and treating the banking malaise. Unlike in the early 1930s when bank presidents could clean out the vault and skip town, the feds have been stalking WaMu for weeks. Seeing no positive end in sight, they seized WaMu's remaining assets and arranged a shotgun wedding to Morgan-Stanley of the viable pieces of WaMu's corpse. All surviving banks are on a very short leash.
Unlike the 1920s and '30s, when lots of towns only had one bank, we still have banking options. WaMu customers can go elsewhere. WaMu's mortgage clients will be seamlessly adopted by Morgan.
But there still are ample reasons to keep an eagle eye on the man behind the curtain. For one thing, this is the same government that permitted this crisis to erupt. Efforts to stuff the lava back into the volcano are being managed by people with little belief in strong regulation. These are people who in many cases openly hope for industry jobs when the Bush administration ends in a few short months.
There also is ample reason to be suspicious of moves that concentrate so much financial power in the hands of Morgan and a few other survivors of the crisis. Recent events are a dream come true for old-fashioned banking titans, the type of people loathed by President Theodore Roosevelt and a generation of anti-monopolists.
Ultimately, preserving our financial wellbeing is up to each of us. In the modern age, this means not overreacting as individuals, but making very certain that our federal servants react appropriately. The next few weeks will severely test the survival of our good sense and trust.
In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. late Thursday and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co.
On Friday, financial stocks and the broader market slumped as investors digested the WaMu news and the wrangling in Washington over a bailout plan. Besides WaMu, which tumbled 90% to 16 cents, Wachovia was among the weakest financials, slumping 24% to $10.35 and putting this week's losses at 45%. Wachovia, like WaMu, has a troubled mortgage portfolio and faces its own uncertain future.
Also Friday, J.P. Morgan priced the capital raising related to its WaMu deal and said it will sell $10 billion in stock - $2 billion more than expected. The public offering is for 246.9 million shares of its common stock at $40.50 a share, a 6.8% discount to its closing price Thursday.
The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis. But the deal, as constructed by the Federal Deposit Insurance Corp., could hold some glimmers of hope for the beleaguered banking system because it averts any hit to the bank-insurance fund.
Instead, J.P. Morgan agreed to pay $1.9 billion to the government for WaMu's banking operations and will assume the loan portfolio of the thrift, which has $307 billion in assets. The full cost to J.P. Morgan will be much higher, because it plans to write down about $31 billion of the bad loans and raise $8 billion in new capital. All WaMu depositors will have access to their cash, but holders of more than $30 billion in debt and preferred stock will likely see little if any recovery.
* The Deal: Regulators seize Washington Mutual, in largest U.S. banking failure.
* The Buyer: J.P. Morgan agreed to buy the company's banking operations, preserving depositors' money.
* Downside: WaMu shareholders and other creditors likely get wiped out.
The deal will vault J.P. Morgan into first place in nationwide deposits and greatly expand its franchise.
The seizure was another watershed event in a frenetic period for the U.S. banking system, and came while members of Congress debated the Bush administration's proposed $700 billion bailout package. The tally of U.S. financial giants that have either been seized by the government or sold themselves off to stronger firms in recent weeks includes mortgage titans Fannie Mae and Freddie Mac, insurer American International Group Inc., and Wall Street firms Lehman Brothers Holdings Inc. and Merrill Lynch & Co.
The failure of WaMu eclipsed what had long been America's largest bank bust on record, the 1984 collapse of Continental Illinois, which had $40 billion in assets.
The fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.
The seizure of Washington Mutual is likely to send tremors through the thrift industry. Many of WaMu's smaller brethren are also struggling with a wave of bad loans and some have already been ordered by regulators to raise capital and stop growing. Many community and regional financial institutions are also slashing dividends, selling branches and reining in lending in order to preserve capital.
WaMu has suffered huge losses but still boasts a strong deposit base and a network of 2,239 branches that bigger banks would have paid dearly for when times were good. In March, with the credit crisis in full bloom, J.P. Morgan offered to acquire WaMu but was spurned in favor of a $7 billion infusion led by the private-equity firm TPG, considered one of the savviest buyout firms. TPG, led by investor David Bonderman, said it will lose $1.35 billion, wiping out its investment.
This is the second time that J.P. Morgan, the second-largest U.S. bank in stock-market value, has been a buyer of last resort. In March, the New York company agreed to purchase Bear Stearns Cos., getting a $29 billion backstop from the federal government.
FDIC Chairman Sheila Bair said that WaMu's downward spiral "could have posed significant challenges without a ready buyer." Referring to J.P. Morgan's willingness to buy WaMu and absorb its shaky loans amid continuing debate over the $700 billion bailout package, she added: "Some are coming to Washington for help, others are coming to Washington to help."
While WaMu has been struggling since last year, its demise occurred with breathtaking speed.
Starting Sept. 15, the day that Lehman filed for bankruptcy protection, WaMu's customers began heading for the exits. Over the next 10 days, they yanked a total of $16.7 billion in deposits, according to the Office of Thrift Supervision. That was about 9% of the thrift's deposits as of June 30. WaMu declined to comment.
Melody Williams, 50 years old, said in the past 30 days she has moved about $25,000 out of Washington Mutual, spreading it to other financial institutions she thought were stronger, including Wells Fargo & Co. Ms. Williams, the controller for an architecture firm, said she thought that Washington Mutual had gotten "too big for their britches" with too many deals over the years.
Regulators also hustled to shut down WaMu faster than they have with other failing banks this year. Normally, when the FDIC and another regulatory agency are preparing to take over a bank, the FDIC will solicit bids for the bank on Tuesday or Wednesday and then seize it on Friday evening, after the bank's branches have closed for the weekend. Sometimes the FDIC will even wait another week to step in. Every bank to fail this year has been shut down on a Friday. The FDIC steps in on Fridays to ensure a smooth transition so that customers hardly notice the handover.
In WaMu's case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts of WaMu. Twenty-four hours later, they were already preparing to seize the bank. Earlier this month, Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal J.P. Morgan had offered earlier this year, according to a person close to WaMu.
As pressure mounted on WaMu over the past two and a half weeks, regulators sparred over how to handle the situation, according to people familiar with the matter. Last week WaMu met in Washington, D.C., with the FDIC and OTS, WaMu's chief regulator. WaMu, according to a person familiar with the situation, asked for the meeting because it had received conflicting information from the two agencies. The tension between the two groups was palpable, this person said. The FDIC, this person said, was more aggressive in describing the information it wanted from the thrift.
Federal regulators said the exodus of deposits left WaMu "with insufficient liquidity to meet its obligations." As a result, WaMu was in "an unsafe and unsound condition to transact business," according to the OTS.
The OTS closed WaMu on Thursday and appointed the FDIC as receiver. The FDIC ran the bidding process that resulted in the decision to sell WaMu's banking operations to J.P. Morgan.
The change, according to OTS, "will have no impact on the bank's depositors or other customers." WaMu's bank branches will open on Friday morning as usual and business will "proceed uninterrupted."
As of June 30, WaMu had more than 43,000 employees, more than 2,200 branch offices in 15 states and $188.3 billion in deposits, according to the OTS.
"The housing market downturn had a significant impact on the performance of WaMu's mortgage portfolio," said OTS director John Reich.
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 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. Those talks were 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 led a deal to inject $7 billion into the thrift this spring.
"Obviously, we are dissatisfied with the loss to our partners from our investment in Washington Mutual," said a TPG spokesman. "The unprecedented turmoil in global financial markets and resulting macro crisis of confidence has radically changed the dynamics for all financial institutions, and led to widespread losses among investors throughout the sector." TPG said its losses are about $1.35 billion, wiping out its investment.
Before the deal, J.P. Morgan ranked as the fourth-largest bank as measured by branches, ranking below Bank of America Corp., 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.
The deal will expand J.P. Morgan's footprint westward and into the South. Most importantly, it will give J.P. Morgan an instant presence in two states where it is now virtually non-existent: California and Florida. Although both states have been battered by the housing market collapse, they still offer significant potential for J.P. Morgan, which can pitch a slew of financial services that weren't big business for WaMu, such as wealth management and commercial banking. WaMu has nearly 700 branches in California and operates more than 250 branches in Florida.
James Dimon, J.P. Morgan's chairman and chief executive, has long coveted Florida - as have his customers. Although WaMu is dominated in Florida by Bank of America and Wachovia, J.P. Morgan is likely to boost WaMu's 3% market share in the state by tapping into its base of New York customers who spend the winter months in Florida.
Last year, one of those New York customers expressed frustration at J.P. Morgan's annual meeting, telling Mr. Dimon "it galls me" that the bank didn't have a presence there.
"It p- me off too," Mr. Dimon said, drawing laughter from the audience. "Believe me, we would love to be much bigger in Florida and we'll find some way to do it. You will see us there."
The job of integrating WaMu's branches into J.P. Morgan's vast network will fall to Charles Scharf, a longtime ally of Mr. Dimon who followed him from Citigroup to Bank One Corp. in 2000. Mr. Scharf, 43, now runs J.P. Morgan's retail operations, which include branch-banking, mortgages and home-equity loans.
Over the past few years, Mr. Scharf has overseen the overhaul of J.P. Morgan's hodgepodge of retail branches that had fallen into disrepair after a slew of big mergers. J.P. Morgan has poured millions of dollars into its tired branches that sometimes featured outdated logos and chipped wood paneling.
Taking a cue, in part, from the fresh looks flaunted by rivals like WaMu, Commerce Bancorp., and Bank of America, J.P. Morgan added brighter lights and carpeting. The bank also hired Lands End to design outfits for branch employees so they had an easily recognizable and uniform appearance.
Along with the new looks, J.P. Morgan launched a technology overhaul of its branch network so that customers who open an account in Texas could make deposits from a branch in New York. That type of integration has been missing from many banks that went through big mergers over the past decade.
J.P. Morgan's branch strategy got another push in 2006, when the bank solidified its hold on New York by acquiring 300 branches from Bank of New York Corp.
The deal is a bold move for Mr. Dimon, 52, who has emerged as one of the banking industry's most powerful executives during the current credit crisis. Just six months ago, J.P. Morgan swept in to acquire Bear Stearns as the brokerage firm was collapsing and heading for bankruptcy. Although J.P. Morgan has also been hurt by the credit crisis, it has one of the strongest balance sheets in the industry despite exposure to many of the banking businesses that are feeling pain.
Since taking the reins of J.P. Morgan nearly three years ago, Mr. Dimon has transformed the bank. Much of those efforts came during a period of prosperity for the banking industry, giving him time to upend the bank's culture and computer systems. Along the way, he has emphasized the need to create a "fortress balance sheet" that can withstand a weak economy.
Still, J.P. Morgan isn't immune to the troubles afflicting thousands of other banks. Its investment-bank unit is expected to take a big hit in the third quarter due to the widespread turmoil in capital markets. The bank has been hit badly by home-equity losses and its massive credit-card business is being hurt by rising delinquencies and defaults.
A former protégé of Citigroup's Sanford Weill, Mr. Dimon was once viewed as his heir-apparent at Citigroup. But the two had a falling out in 1998 that led to Mr. Dimon's ouster. In a move that startled the New York banking industry, Mr. Dimon headed west to take the top job at Bank One, a regional Chicago bank that had stumbled after a string of acquisitions.
Mr. Dimon's return to New York came in 2004, when J.P. Morgan acquired Bank One for $58 billion. That deal put Mr. Dimon into the upper ranks of J.P. Morgan's management and paved the way for him to take over as chairman and chief executive officer.
String of Mergers
WaMu, founded in 1889, became a national mortgage- and consumer-lending giant via a string of mergers in the 1990s led by Chief Executive Officer Kerry Killinger. But Mr. Killinger made several missteps. He pursued an aggressive retail expansion marred by poor locations in too many markets. He steered WaMu into subprime mortgages, only to discover too late that the thrift was lending to many unqualified borrowers.
This year the company laid off employees, closed mortgage centers and cut its dividend.
But it still posted a $3.3 billion second-quarter loss and said it expected to lose $19 billion on its mortgage portfolio over the next two and a half years. WaMu's biggest predicament was that it held large amounts of mortgages made in U.S. regions where housing prices have fallen sharply, such as California. WaMu has $53 billion in option adjustable-rate mortgages, a type of loan particularly vulnerable to default, as well as $16.1 billion in loans made to subprime borrowers.
The board, responding to investor discontent, stripped Mr. Killinger of his chairman's title and then ousted him Sept. 7, installing Brooklyn banker Alan Fishman in his place. Messrs. Killinger and Fishman couldn't be reached for comment Thursday night.
Upon taking WaMu's helm, Mr. Fishman, who had run Independence Community Bank in Brooklyn, N.Y., before selling it to Sovereign Bancorp Inc. in 2005, declared his intention to keep WaMu independent. As rumors swirled about the company's financial troubles, he tried to reassure investors and depositors by releasing more details about the company's financial health.
But Mr. Fishman seemed to realize that WaMu's problems were intractable. Last week, he asked Goldman Sachs Group Inc. investment bankers, hired by WaMu earlier in the year as it sought additional capital, to put the thrift up for sale.
In a year in which a number of financial-services CEOs have had remarkably short tenures - notably Merrill Lynch's John Thain and AIG's Robert Willumstad - Mr. Fishman stands out. While it's not clear what role, if any, he will play following the J.P. Morgan transaction, he has been on the job for a mere 16 days.
WaMu's deal team, including Mr. Fishman, left New York on Thursday night and caught a plane back to Seattle, not knowing that the company was about to be taken over by the OTS and sold to J.P. Morgan.
-Damian Paletta and Peter Lattman contributed to this article.