WaMu seized; assets sold

By Elizabeth Strott

In the biggest bank failure in U.S. history, beleaguered mortgage lender Washington Mutual (WM, news, msgs) was taken over by regulators late Thursday, who struck a deal for JPMorgan Chase (JPM, news, msgs) to swoop in to buy most of the thrift's assets for $1.9 billion.

"With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business," the Office of Thrift Supervision said on its Web site.

WaMu's customers had withdrawn $16.7 billion in deposits since the Seattle company put itself up for sale Sept. 15. The company had assets of $307 billion and more than 43,000 employees.

While not unexpected, the failure of the nation's biggest thrift institution served as one more jolt to an anxious financial system struggling to come to terms with a blizzard of bad loans.

• Video: Analyzing WaMu's wipeout

Washington Mutual's shares ended the premarket trading session at 16 cents, down 90%. The stock wasn't traded after the opening bell in New York. Investors reacted positively to JPMorgan Chase's acquisition; its shares shot up 11% today to close at $48.24.

Other financial stocks slumped today as investors digested the WaMu news and weighed the impasse on Capitol Hill over the Bush administration's bailout plan.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., which put together the deal, sought to assure WaMu's customers. "For bank customers, it will be a seamless transition," she said in a conference call with reporters Thursday night. "There will be no interruption in services, and bank customers should expect business as usual come Friday morning.”

The losers in the deal: WaMu shareholders and private-equity firm TPG Capital, which led a $7 billion cash infusion in the thrift in April. Those investments are now worthless.

JPMorgan said it will assume WaMu's loan portfolio. It plans to write down $31 billion of bad loans in that portfolio and raise $8 billion in new capital.

With the acquisition, JPMorgan Chase becomes the nation's largest bank, in terms of customer deposits, with deposits of more than $900 billion.

"This is a definite win for JPMorgan," Sebastian Hindman, an analyst at SNL Financial, told The Associated Press. Hindman said JPMorgan should be able to shoulder the $31 billion writedown.

JPMorgan, which picked up distressed investment bank Bear Stearns in March, gets WaMu's 2,200 branches in 16 states. The New York commercial bank said it planned to close about 10% of the two companies' 5,400 branches in 23 states, the AP reported.

"We're in favor of what the government is doing (in brokering the sale of Wamu's assets) but we're not relying on what the government is doing. We would've done it anyway," Jamie Dimon, JPMorgan's chief executive, said Thursday.

Dimon's earlier overture rejected

Washington Mutual had been buffeted by losses related to the mortgage-market meltdown over the past year.

In December 2007, the bank closed its subprime lending business, cut its dividend and announced layoffs. Washington Mutual had rejected an $8-per-share offer from JPMorgan in March, but the bank continued to struggle, and the stock spiraled lower.

The thrift ousted its chief executive, Kerry Killinger, on Sept. 8, and put itself on the block one week later.

JPMorgan initially expressed interest, as did Citigroup (C, news, msgs), Spain's Banco Santander (STD, news, msgs), Wells Fargo (WFC, news, msgs) and several private-equity firms, but no buyers had come forward.

Washington Mutual's failure is the biggest ever in the nation's banking sector. The thrift became the 13^th financial institution to fail this year. The failure of WaMu, with $307 billion in assets, dwarfs the second-biggest bank failure in U.S. history -- the 1984 demise of Illinois National Bank, which had $40 billion in assets. The government seized IndyMac in July, which had $32 billion in assets.

JPMorgan said it expects to take $1.5 billion in pretax costs because of the deal, but it also expects the acquisition to add 50 cents per share in 2009 earnings.

Washington Mutual's Web site already has a "welcome to JPMorgan Chase" message up.

In separate news, JPMorgan announced plans to raise $8 billion by selling common shares of its stock.