Washington Mutual, the giant lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators Thursday night, in what has been the biggest bank failure in American history.
Federal regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual, the nation's largest savings and loan, to JPMorgan Chase for $1.9 billion, averting another potentially huge taxpayer bill for the rescue of a failing financial institution.
Customers of Seattle-based WaMu are unlikely to be affected, although shareholders and some bondholders will be wiped out.
By taking on all of WaMu's troubled mortgages and credit card loans, JPMorgan Chase has absorbed $31 billion that would normally have fallen to the Federal Deposit Insurance Corporation (FDIC), which guarantees account holders up to $100,000.
JPMorgan Chase, which acquired Bear Stearns only six months ago in another shotgun deal brokered by the government, took control of all of WaMu's deposits and bank branches Friday, creating a nationwide retail franchise that rivals only Bank of America.
But JPMorgan Chase also took on WaMu's big portfolio of troubled assets, and plans to shut down at least 10 percent of the combined company's 5,400 branches in markets like New York City and Chicago, where they compete. The bank also plans to raise an additional $8 billion from common stock they issued Friday to pay for the deal.
Washington Mutual, with $307 billion in assets, is the biggest bank failure in history, eclipsing the 1984 failure of Continental Illinois National Bank and Trust in Chicago, an event that presaged the savings and loan crises. IndyMac, which was seized by federal regulators in July, was one-tenth the size of WaMu.
The savings and loan crises of the 1980s and 1990s (commonly referred to as the
S&L crises) was the failure of 747 savings and loan associations (S&L's) in the United States. The ultimate cost of the crises is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by U.S. taxpayers, which contributed to the largest deficits of the early 1990s.
Silverado Savings and Loan collapsed in 1988, costing U.S. taxpayers $1.3 billion. Neil Bush, son of then vice president George H.W. Bush, was Director of Silverado at the time. It was found that Neil Bush had engaged in numerous "breaches of his fiduciary duties involving multiple conflicts of interest."
Neil Bush made a loan to himself and voted to approve $100 million in what were ultimately bad loans to two of his business partners. And in voting for the loans, he failed to inform fellow board members at Silverado Savings & Loan that the loan applicants were his business partners.
Although Neil Bush was never indicted on criminal charges, a civil action was brought against him and the other Silverado directors by the FDIC; it was settled out of court, with Neil Bush paying a $50,000 fine.
Neil Bush was banned from banking for his role in taking down Silverado, which cost U.S. taxpayers $1.3 billion. A Resolution Trust Corporation lawsuit against Neil Bush and other officers of Silverado was settled in 1991 for $26.5 million.
MOREThe seizure of WaMu by the government and the deal arranged with JPMorgan Chase came as a complete shock to Washington Mutual's board, which was kept completely in the dark. WaMu's new CEO, Alan H. Fishman, was in midair, flying from New York City to Seattle at the time the deal was brokered.
The government has been dealing with troubled financial institutions differently. Lehman Brothers and Washington Mutual, which were less entangled with the rest of the financial system, were allowed to collapse. But the government took emergency measures to stabilize Goldman Sachs, Morgan Stanley and insurance giant American International Group (AIG).
U.S. Treasury Secretary Henry Paulson, Jr., who is in charge of the financial bailout, previously served as Chairman and CEO of Goldman Sachs. Goldman Sachs has been the biggest beneficiary of the government's bailout. Besides being treasury secretary, Paulson also is a member of the International Monetary Fund Board of Governors.
MOREFederal regulators had been trying to broker a deal for Washington Mutual because a takeover by the FDIC would have dealt a crushing blow to the federal government's deposit insurance fund. The fund, which was $45.2 billion at the end of June, has been severely depleted after suffering major losses from the collapse of IndyMac Bank. The failure of WaMu would have cost the FDIC fund $30 billion or more.
The U.S. Congress hasn't been doing its job. Congress is suppose to watch the people working on Wall Street and in the banking industry, but they haven't. There has been very little oversight of Wall Street and the banks.
The financial crises wasn't caused just by bad mortgages (sub-prime home loans). Wall Street and the mortgage lenders engaged in crooked business practices -- falsifying documents and not verifying the customer's income and ability to pay back the loan.
The takover of WaMu by the government and JPMorgan Chase ends WaMu's 119-year run as an independent company and gives JPMorgan Chase branches in California and other markets where it didn't have a big presence.
Until recently, Washington Mutual was one of Wall Street's strongest performers. It reaped big profits quarter after quarter as its then CEO, Kerry K. Killinger, enlarged its presence by buying banks on both coasts and ramping up mortgage lending.
Killinger's goal was to make WaMu the "Wal-Mart of banking," which would cater to lower-and-middle-class consumers that other banks deemed too risky.
WaMu offered complex mortgages and credit cards whose terms made it easy for the least creditworthy borrowers to get financing, a strategy the banks extended in big cities, including Chicago, Los Angeles and New York City. With this plan, Killinger built Washington Mutual into the sixth-largest bank in the United States.
But underneath the hood, WaMu's machinery was failing.
Then the housing market began to crumble. Like so many other financial institutions, WaMu tried to hedge its mortgage bets -- but did poorly. It retrenched on its branch-building ambitions. But none of that was enough to deflate ballooning losses on mortgage loans, nor defuse ticking time bombs like interest-only and pay-option amortization products that had reeled in bottom-grade borrowers.
With rising mortgage payments and higher gas and food bills, WaMu's losses in its big credit card loan portfolio also surged.
By then, WaMu's troubles had set off alarm bells on Wall Street, which ground its stock price down daily.
With options narrowing, WaMu frantically reached out to several banks and big private equity firms, including the Carlyle Group and the Blackstone Group.
In March, JPMorgan Chase saw an opportunity and urged WaMu in a letter to consider a quick deal. On the same weekend that the Bear Stearns takeover by JPMorgan Chase was negotiated, JPMorgan Chase Chairman and CEO James Dimon sent members of his team to Seattle to meet with WaMu executives. JPMorgan Chase offered WaMu $8 a share, largely in stock. But Killinger balked at the deal.
In April, David Bonderman, a founder of the TPG private equity firm, and a group of institutional investors agreed to infuse $7 billion into WaMu. Killinger kept his job, and Bonderman, who had served as a WaMu director from 1997 to 2002, got a board seat and 176 million WaMu shares priced at $8.75 each -- a steep discount of over 25 percent to that day's share price.
While the takeover of WaMu was very sweet for Bonderman, it eroded the value for existing shareholders. They moved on June 2 to strip Killinger of his chairmanship. Bonderman, meanwhile, watched his golden bet turn to dross.
MOREContact your representative in CongressContact your SenatorThe U.S. ConstitutionDeclaration of Independence from government tyranny and your Bill of Rights as a U.S. citizenU.S. Constitution cases, codes and amendments in a easy to understand formatContact the news media and talk shows here American taxpayers should not be forced by the government to pay for the mistakes and bad business practices of Wall Street and the banks. American taxpayers should not be punished for what the crooks on Wall Street did to the financial system.
Investigator D. Brian Blackwell - a correct thinking republican
Director, Brian Blackwell QI Services, Inc. Denver
BrianBlackwell.com
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