Friday, September 26, 2008

JPMorgan Buys WaMu Deposits as Regulators Seize Failed Thrift

If you remember on Monday, I posted that there will be more to come....

JPMorgan Chase & Co. became the biggest U.S. bank by deposits, acquiring Washington Mutual Inc.'s branch network for $1.9 billion after the thrift was seized in the largest U.S. bank failure in history.

Customers of WaMu withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank "unsound,'' the Office of Thrift Supervision said late yesterday. WaMu's branches will open today and depositors will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.

WaMu is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and I out of business and led to the hastily arranged rescues of IndyMac Bancorp, Merrill Lynch & Co. and Bear Stearns Cos., which was itself absorbed by JPMorgan. WaMu in March rejected a takeover offer from JPMorgan Chief Executive Officer Jamie Dimon that the savings and loan valued at $4 a share.

"This is a fabulous franchise,'' Dimon, 52, said in an interview. "We think we got this at a price that protects us, where if we were wrong, it still protects us.''

WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week. WaMu fired CEO Kerry Killinger on Sept. 8 and replaced him with Alan Fishman, who was awarded a $7.5 million signing bonus and $1 million salary.

WaMu's Decline

In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 45 cents in extended trading following the announcement, which came after the close of regular trading.

David Bonderman's TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was "dissatisfied with the loss'' and that the WaMu investment was a "small part of assets.''

New York-based JPMorgan, which separately announced plans to raise $8 billion by selling common stock, had its outlook lowered to negative by Moody's Investors Service. Moody's left its Aa2 rating on JPMorgan unchanged.

JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy.

'They're Going to Win'

"This is one of the reasons I own JPMorgan: They're going to win from all this,'' said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York. "They're taking on credit risk, but they're not taking on any debt obligations.''

JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits, the most of any U.S. bank. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said.

JPMorgan had 75 people involved in the transaction and "bid to win'' because it wanted WaMu's assets, Dimon said on a conference call yesterday. JPMorgan used its own investment bank to value the mortgages, he said.

"We don't know and we don't care'' about rival bids for WaMu, he said.

Dimon also said on the conference call that he's in favor of the government's proposed $700 billion plan to prop up the banking industry, but didn't rely on it to complete the deal. The plan was jeopardized yesterday as congressional Republicans failed to agree on its details.


JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.

Citigroup Inc., which had been among five potential acquirers, elected not to bid for WaMu because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.

The acquisition may add 50 cents a share to earnings in 2009, JPMorgan said in a statement yesterday. The firm said it may save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges. JPMorgan will close less than 10 percent of the combined retail shops.

Customer Deposits

WaMu had about 2,300 branches and $182 billion of customer deposits at the end of June. Its $310 billion of assets dwarf those of Continental Illinois National Bank and Trust, previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

JPMorgan rose $2.96, or 7.3 percent, to $43.46 yesterday in New York Stock Exchange composite trading before the deal was announced. It is little changed for the year.

WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debtholder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that's below investment grade.

During the past three quarters, WaMu lost $6.3 billion. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets.

'No Mystery'

"It's no mystery to depositors that WaMu shares have collapsed over the past couple months,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. "The FDIC is primarily concerned about the deposit base and that's been safely transferred.''

WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.

WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days, leaving it at CCC. Fitch Ratings and Moody's Investors Service cut WaMu to junk this month and have BBB- and Ba2 ratings, respectively.

"There were extreme liquidity pressures on this institution exacerbated by some ratings downgrades,'' FDIC's Bair said.

Rise of WaMu

Killinger, WaMu's ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.

Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.

Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans.

"There's a lot of sadness and a lot of people are hurt,'' Lee Lannoye, 71, who was chief credit officer at WaMu from 1988 to 1998, said yesterday. ``Having worked with Kerry Killinger for 10 years, I still absolutely cannot fathom where or why he went wrong, and what caused him to lead the company into taking the kinds of risks that they did.''


Sources: Wachovia Securities, Leer Financial

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