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Federal bank regulators seize Washington Mutual on September 25, 2008.

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On the afternoon of September 25, 2008, Washington Mutual, the nation’s largest savings and loan bank, is seized by the federal Office of Thrift Management. It is the largest bank failure in United States history. Regulators quickly sell Washington Mutual to JPMorgan Chase & Co., which has long sought to acquire it. The collapse of WaMu is directly linked to subprime mortgages and other poor-quality loans that characterized the national housing boom the bank helped create in the early years of the twenty-first century and comes as President George W. Bush and Congress attempt to craft a $700 billion bailout of the stricken U.S. financial industry.

A History of Prudence

The bank was founded as Washington Building Loan and Investment Association to help rebuild Seattle after the devastating fire of June 6, 1889, leveled most of the downtown business district. The bank soon made the first installment loan for a home on the West Coast -- $700 to a Ballard seaman. During most of the 119 years after its founding, the bank, which reorganized as Washington Mutual Savings Bank in 1917, had a reputation as a prudently run institution that stashed away money in good times in order to weather bad ones.

It began a student saving program in the 1920s, bailed out the Continental Mutual Savings Bank during the Depression (its first acquisition of another bank), and pioneered The Exchange, the nation’s first shared cash-machine network, in the 1970s.

Fevered Times, Risky Credit

Washington Mutual began to show larger ambitions in the 1980s, acquiring the Spokane-based brokerage firm Murphey Favre and converting from mutual ownership to a publicly traded company on March 11, 1983. A Murphey Favre executive, Kerry Killinger, quickly climbed the Washington Mutual corporate ladder and was CEO by 1990. He put the bank on a path of rapid expansion, as it acquired more than two-dozen other financial firms in the Northwest and as far afield as New York and Phoenix. By 2001, WaMu, as it was by then universally known, was the largest mortgage originator in the country.

What became known as the housing bubble was in full swing, propped up by historically low interest rates. Some lenders, WaMu among them, began making adjustable-rate mortgages, zero-down loans, and extending other risky credit to buyers who in less fevered times would never have qualified for a loan. These bad loans were bundled up with better-quality ones and sold to banks and other investors around the world. Then a housing glut in such “hot” markets as California, Arizona, Nevada and Florida combined with rising interest rates to shake the housing and banking industries to their core. As interest rates rose, so did payments on adjustable-rate mortgages. Defaults grew, and great uncertainty about the true value of those bundled mortgages held by banks worldwide triggered a credit crunch in which not only individuals, but large institutions found it difficult to borrow.

Pressure Mounts

In the months before its collapse, Washington Mutual attempted to reassure investors and depositors that it could weather the credit storm. It raised $7.2 billion in April 2008 from the private equity firm TPG. But pressure continued to mount as the federal government took control of Fannie Mae and Freddie Mac, the nation’s two largest purchasers of mortgage debt, the investment bank Lehman Brothers filed for bankruptcy protection, and financial giant Merrill Lynch had to be rescued by Bank of America.

Declining confidence in WaMu led to a run on the bank in mid-September, Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, said. In little more than a week, worried investors withdrew $16.7 billion in deposits. "This institution was under extreme liquidity pressure, and it needed to be addressed this week," Bair said on September 25, 2008 (DeSilver, The Seattle Times).

Welcome to JPMorgan Chase

Within hours after regulators seized the bank, it was sold to JPMorgan Chase for $1.9 billion. The big New York bank got WaMu’s remaining $134.7 billion in deposits and its 2,207 branches in 15 states. JPMorgan earlier in 2008 had offered $7 billion in stock for the bank.  JPMorgan said it would write down $31 billion in WaMu loans, thus possibly sparing taxpayers an expensive bailout. JPMorgan will emerge with 5,410 branches in 23 states, perhaps 10 percent of which may be closed where branches of the two banks overlap.

The F.D.I.C. pledged that no depositors would be hurt by WaMu’s collapse, and the day after its swan dive branches were open and doing business as usual. The bank website bore this message: “WaMu Customers: Welcome to JPMorgan Chase.”

Devastation for Seattle

The bulk of WaMu’s 43,200 employees nationwide appeared likely to become JPMorgan workers. At WaMu headquarters in the landmark Washington Mutual Tower at 1201 3rd Avenue in Seattle, however, the outlook for 3,500 employees was somewhat dimmer. “The entirely predictable consequence of this deal for Seattle will be the loss of thousands of well-paid jobs, hundreds of thousands of square feet of office space emptied out, and a serious downshifting of local giving,” a Seattle business columnist wrote (Talton, The Seattle Times). “It’s devastating, said Greater Seattle Chamber of Commerce President Steve Leahy (Virgin, James, Richman, Post-Intelligencer).

The WaMu collapse also was devastating for equity investors who had held on to the end and for bondholders. Both were wiped out. WaMu stock, which had traded as high as $45.91 a share in 2006 stood at 16 cents when the New York Stock Exchange halted trading in the shares.

Sources:
Drew DeSilver, “End of WaMu,” The Seattle Times, October 26, 2008, p. A-1; “Washington Mutual: A Long History,” Ibid, September 21, 2008, p. A-11; Jon Talton, “WaMu Devastating for Seattle,” Ibid, September 26, 2008, p. A-1; Bill Virgin, Andrea James, Dan Richman, “WaMu Seized, Sold,” Seattle Post-Intelligencer, September 25, 2008, p. A-1; “A Century of Independence,” Ibid, September 25, 2008, p. A-10; “JPMorgan Chase acquires the deposits, assets and certain liabilities of Washington Mutual’s banking operations,” JPMorgan Chase website accessed September 26, 2008 (http://www.jpmorganchase.com/cm/Satellite?c=Page&cid=1159304834085&pagename=jpmc/Page/New_JPMC_Homepage); Eric Dash and Andrew Ross Sorkin, “Government Seizes WaMu and Sells Some Assets,” The New York Times website accessed September 26, 2008 (http://www.nytimes.com/).

By Tom Brown, September 26, 2008

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