WaMu: …and, there it goes.

Bloomberg: JPMorgan Buys WaMu’s Deposits as Thrift Is Seized

JPMorgan Chase & Co., the third- biggest U.S. bank by assets, agreed to pay $1.9 billion for the deposits of Washington Mutual Inc. after the thrift was seized by regulators in the biggest bank failure in U.S. history.

The U.S. government closed Seattle-based Washington Mutual amid customer withdrawals of $16.7 billion since Sept. 15, the Office of Thrift Supervision said in a statement. WaMu had “insufficient liquidity” and was in an “unsound” condition, the OTS said.

“JPMorgan is getting a steal compared with what they were going to pay,” said Scott Adams, a pension and investment analyst at the American Federation of State, County and Municipal Employees in Oakland, California, which owns WaMu shares. “It’s very tragic.”

WaMu collapsed after its credit rating was slashed to junk and potential suitors passed on making a bid. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week.

New York-based JPMorgan won’t acquire liabilities of the lender, including claims by shareholders and subordinated and senior debt holders, the Federal Deposit Insurance Corp. said.

For those of us that still have some money in accounts, the FDIC page on the failure/sale has some details about how the transition is going to go down.

I left a few hundred dollars in an account there just out of morbid curiosity. Also, it allows me to write about the process from the perspective of a depositor.

I hope none of you bought lots of WaMu stock when it was $2 thinking it was a good deal…

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

47 comments:

  1. 1
    James says:

    And why would we have bothered to make a run on the bank, even figuring this was coming? (Assuming <100K sitting in checking.)

    “For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning.”

    I think your morbid curiosity is going to be pretty bored.

  2. 2
    Alex says:

    I wonder what that means for the housing market. It is safe to assume, probably, that the majority of WaMu employees will lose their jobs.

  3. 3
    kingcountyhomeowner says:

    In a 2006 Seattle PI article, WAMU had 5700 employees in Seattle and 7700 in King County. I think the impact of the failure will have some impact on the local economy, but how much? I don’t know. Let’s see how the other big local industries fare with the current ‘recession.’

  4. 4
    jon says:

    JP is expecting another 8% drop in US house prices. 20% if a severe recession. Interesting chart over at

    http://calculatedrisk.blogspot.com/2008/09/jpmorgan-conference-call.html

  5. 5
    Scotsman says:

    It looks like they intend to keep 3/4 of the branches open, but the HQ employees are probably largely surplus. Ouch.

    The 8-20% drop in housing prices will turn out to be a miscalculation. JPM is now exposed to $1.3 trillion in mortgages, twice the size of the current bailout proposal. Too big to fail, or a potential disaster?

  6. 6
    John says:

    Alex, the combined company will cut 10% of all branches so he tellers should be fine. I think the corporate jobs in downtown will be cut first.

  7. 7
    Euro says:

    By leaving ‘just a few dollars on the bank out of curiosity’, you became part of the problem (assuming you took most out). I left my money at WAMU (less than 100k, but a good sum) in the hope most people would. After all, avoiding massive withdrawals is large part of the point of FDIC insurance, isn’t it? It’s a shame they fell over.

  8. 8
    AndyMiami says:

    we really should be concerned with what is happening…and TIM, your somewhat sarcastic comments are a bit disconcerting with what we all face…this is a terrible situation that will affect all of us, renters, owners, people all over the place…we have a grave economic calamity taking place and we cannot look at this lightly..a revolution of LESS IS MORE will take place….LESS IS MORE…

  9. 9
    LoneLibertarian says:

    This is not really that big of a news item for people really following this story. It is no surprise that JPMorgan purchased wamu’s retail banking sector; this has been talked about and rumored for years. The idiot Killinger screwed the company by not selling it to JP years ago.

    I left my money (well under 100k) in the bank knowing that 1 of 2 things would happen.

    1) WAMU goes bankrupt and closes and JP buys its assets for pennies on the dollar.
    2) WAMU gets closed by FDIC and JP buys its assets for pennies on the dollar.

    Now owning stock in this company is a different situation and I feel bad for people who did.

  10. 10
    smoejoe says:

    running on a bank is wrong and helped create the great depression. FDIC means your money is insured by the government. If people continue to bank hop it helps cause more banks to fail and escalates the cascade. As a blogger with a few readers you should not encourage this activity.

  11. 11
    jon says:

    JP took on a lot more exposure focused in the CA and FL markets. Seems pretty risky to me, since WAMU was just on the brink of 0 and heading down pretty fast. They plan to make a profit by jacking up fees and reducing expenses quickly. If their low-fee paying WAMU customers decide they would rather find another low fee bank, it could turn out painful.

  12. 12
    economist says:

    Now owning stock in this company is a different situation and I feel bad for people who did.

    Why? They are the owners of the company. If a company is badly run, the owners deserve to lose money. If you don’t want your money at risk, don’t put it into equities.

  13. 13
    Scotsman says:

    Breaking news- and just in time, as I’m heavily invested here… (Sorry, but some humor might help)

    With prices of TY’s Beanie Babies trading well off the highs they reached toward the end of the last millennium, Treasury Secretary Hank Paulson announced that the administration will inject $300 million into the market with open-market purchases on eBay, and at flea markets, garage sales and thrift shops.

    In a statement, Federal Reserve Chairman Ben Bernanke told reporters that officials “recognize and acknowledge that the immediate cost to taxpayers is substantial, but we believe that this is a necessary move to shore up confidence in the secondary market for plush animals, and going forward, anticipate that this measure will deliver long-term value to taxpayers as the market bounces back.”

    In anticipation of the announcement, Morgan Stanley CEO John Mack has been buying up depressed stuffed animals including Seaweed the Seal, Peanut the Royal Blue Elephant, Harry the Hampster and Runner the Mongoose. He told analysts on a conference call that as the federal cash infusion shores up the market, the bank will be able to report mark to market gains that will improve its capital position and reduce the need for further dilution of shareholders.

  14. 14
    Mark says:

    “The U.S. government closed Seattle-based Washington Mutual amid customer withdrawals of $16.7 billion since Sept. 15”

    It’s all about confidence. Countrywide, Bear Stearns, Fannie Mae, Freddie Mac, Indymac, Lehman Brothers, Merrily Lynch, and many other smaller banks have either gone under or have been taken over for pennies on the dollar.

    People are starting to wake up to what is happening. A good protion of the $16.7 Billion was probably over the FDIC limit of $100k. Taking that money out and putting it in another bank would have been enough to push WM over the edge. If enough people lose confidence in the system a crash of the entire system can become a self fulfilling prophecy.

    These are historical events that we are witnessing. I hope someone can get a handle on the situation. Our leadership in D.C. don’t seem capable.

  15. 15
    Sniglet says:

    So what is happening to people who own WaMu shares and bonds? Are they the ones taking it on the chin with this buy-out? If so, I wonder who the bag-holders are? Maybe some mutual funds hold a lot of WaMu bonds…

  16. 16
    Timber says:

    Will Wachovia be next? I wonder where that WaMu guy is that posted a couple of weeks back saying that WaMu wasn’t on the brink of collapse then Tim announced that he was a WaMu employee? Would be interesting to have an insiders perspective of whats going on.

  17. 17
    Matthew says:

    I…….
    TOLD……
    YOU……
    SO………
    !!!!!!!!!!!!!!!!!!!!!!!!!!!

  18. 18
    Bryant says:

    More important.. JP is only buying the deposit accounts/etc. What happens to the billions of dollars of bad mortgages? Do those become the responsibility of the government?

  19. 19
    Jaye says:

    will Wachovia be next?

    Not unlikely. Buying Golden West for actual cash (rather than waiting for it to fail) may be their downfall.

  20. 20
    stephen says:

    It was not a buy out. The bank was taken over by the FDIC and then some of the assets immediately sold to JP. The stock holders are going to get nothing on this one.

  21. 21
    b says:

    A lot of the major non-financial media outlets (I am looking at you CNN) are reporting this as a buy out or purchase of WaMu by JPM. I guess that is to try and prevent bank runs on other institutions tomorrow. For those asking about the garbage paper, WaMu was seized by the FDIC today and JPM bought the good stuff (deposit base and branches) from them for a small sum. All of the garbage is being left for the FDIC to sort out, likely bondholders and equity folks will be getting little to nothing.

  22. 22
    jon says:

    JP is getting $296B of assets (mortgages) and $265B of liabilities (deposits). That is $31B of net assets, but there are $31B of markdowns to account for the junk.

    I don’t think this makes any sense unless they are want to get a bigger piece of the $700B bailout by buying more bad mortgages. And given WAMU’s focus on CA and FL there is a lot of junk there. Maybe they agreed based on the sense earlier today that a bailout deal had been struck?

  23. 23
    Markor says:

    The Tim: I hope none of you bought lots of WaMu stock when it was $2 thinking it was a good deal…

    I admit I considered it. But in such situations I always recall the wisdom “if you don’t know who the fool is, it’s you”.

    I also left some money there, because I had confidence that a switchover would be smooth enough and I like their auto-bill-pay service, so far.

  24. 24
    Matthew says:

    If the bailout does not go through, Jamie Dimon is going to regret this deal.

  25. 25
    James says:

    From the WSJ: “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.”

  26. 26
    Markor says:

    Euro: By leaving ‘just a few dollars on the bank out of curiosity’, you became part of the problem (assuming you took most out). I left my money at WAMU (less than 100k, but a good sum) in the hope most people would.

    I think “every person for themselves” is appropriate now. WaMu certainly didn’t give any public notice in the hours before the FDIC takeover.

  27. 27
    Matthew says:

    Euro,

    The FDIC has 45 billion dollar left on their balance sheet. Wamu has deposits of 182 billion. Do the math.

  28. 28
    jonness says:

    As I predicted on Sept 2nd, 2008, this bank was seized by the FDIC. (In a subsequent post I named WAMU as the bank I was speaking of and said I expected it to happen within the month):

    “What’s next? IMO, a major bank failure will drive the country further into the fear zone. The government will act swiftly to amputate the limb. Consumers will continue to lose confidence in the economy, and house prices will continue to correct toward historic income:home price ratios.”

    https://seattlebubble.com/blog/2008/09/02/taking-advantage-of-a-buyers-market/

    So enough with the simple short-term predictions that most of us foresaw. Here’s my mid-term prediction:

    The $1 trillion bailout will not stop the housing slide because it ultimately will not be enough to restore liquidity. Banks will buy Treasury notes and other such relatively safe investments to brace for further declines as opposed to writing risky loans in a collapsing housing market. While we would expect inflation to take off like mad dogs from all of the money being printed, the bulk of that money will be held by the banks and will not circulate within the economy. Thus, we will see massive deflationary pressure offset the inflationary pressure. House prices will continue to fall, and the crisis will be slow and drawn out. A typical recession is followed by rapid expansion once economic cleansing takes place. But the slow drawn out economic collapse created by Paulson will lead to economic stagnation for years to come. By the end of winter, a new face will ask taxpayers to fork over another extremely large sum of money, thus putting the solvency of the U.S. in great danger.

  29. 29
    Thehulk says:

    Already pulled my money out a couple of weeks ago. Certainly dont own any WM stock. For chrissake the writing was on the wall for a long long time.

  30. 30
    robroy says:

    Yeah, I think Wachovia will be next.

    I wonder if people realize just how much of downtown Seattle’s office space is filled by Wamu people.

    It is significant. When I took the bus downtown for my second consulting gig a few years ago I was really shocked at how many of the riders on the busses (143 and 111) were Wamu corporate employees.

    This happening in the culture of what is going on in DC is interesting. I tell people at work I can show them our future and then I just go to My.Yahoo.com and bring up the “maximum” view of the dow. I then squeeze the range to the 1929 – 1933 time period and say, “See this graph? That little drop in October of 1929 is now. The drop you see for the next 2.5 years until July of 1932 is what we will be seeing now.” To seal the deal I show them the infamous graph of total dollars worth of Alt-A, Option Adjustable rate and subprime loans set to reset in the next few years.

    It’s all right there for anyone with eyes to see. It has been there for years. It is why I rent.

    Interesting times.

  31. 31
    robroy says:

    I have an account at WAMU that I use for my band profits and expenses. I left it at $5.33 a few months ago. I like getting the monthly statements reminding me I have $5.33 in Wamu. I tried to keep it below the $100k limit…

  32. 32
    Buceri says:

    I just heard on KIRO that JPMorgan has the right to change all existing WaMu customer loans interest rates including mortgages (to “adjust” for risk).

  33. 33
    richie says:

    Scotsman

    JPM’s did not participate in subprime or alt-a mortgages except the ones from Bear Stern which were guaranteed by Fed.

    JPM and Well-Fargo are the only big banks left in excellent shape.

  34. 34
    davidb says:

    Gloomy prediction by jonness@26! I wish I could say I didn’t agree with him but I think he’s right!

    There’s not any good news for our economy in the short term. The politicians are working to get a package passed so they can say they did something but the issues are too complex to be able to get them solved with any effective legislation so quickly!

  35. 35
    3rd Generation says:

    Bye Bye WaMu.

    No more WuHoo, me love you long time…

    Good Riddance. More to Come regrdless of the Washington DC shenanigans.

    Who’s NEXT?

  36. 36
    Ray Pepper says:

    Okay Bubble Heads……Time is now…………I have wanted to start a Credit Union for years……….Who’s in??…………..We lend only on GEMS!

  37. 37
    david losh says:

    [deleted]

    Comment #15 should be removed.

    Washington Mutual is a business that makes money. It’s continuing to make money today. Without the bail out this company makes money and with a bail out this company makes more money.
    “Write downs” means they have adjusted the asset prices to correspond with value. If these companies knew what the value of the assets were why did they lend so much more than the asset was worth?
    Our government is trying to scare you into believing there is no money. There’s plenty of money in the system.
    Banks need to go back into the system and “fix” their own loan portfolios. Any of these assets can be made performing, banks just don’t want to. Banks want to generate fees. Banks want to make bigger profits today so the stock value looks good. Then they can drive up the price of the stock to make more easy money.
    It has to stop.

  38. 38
    The Tim says:

    Whoa, good call David. Sorry, I just got back from CA, so I’m trying to catch up this morning. That one slipped by me.

  39. 39
    Ray Pepper says:

    Oh No!!! Not NCC….down almost 50%…..500 Realty’s lead advertiser…Ouch. Charge off’s on 20% of its 17 bill portfolio….Looks like 500 Mtg is getting started quicker then planned.

  40. 40
    Notabull says:

    “Banks need to go back into the system and “fix” their own loan portfolios. Any of these assets can be made performing, banks just don’t want to.”

    If banks “fixed” their portfolios by writing down their value to realistic values, they’d be absolutely screwed and the FDIC would be immediately knocking on the door. Why? Because banks lend according to the amount of assets they have. So if their assets decrease in value due to a write down (or bank run) they have 3 options:

    1) Raise capital to add to assets. Issue new stock (if your stock price is actually worth anything) or sell something you have that somebody else wants.

    2) Get more deposits from retail customers. Anyone else think it was odd why Wamu was offering 5% CDs when every other sane bank was offering 3.5 or 4%? It didn’t matter if it was a losing deal, they just needed your cash.

    3) Get back the money from all those loans you made. Uhhh, not gonna happen immediately… At best you get the money back over a number of years and with rates going higher, less people can refinance and pay back what they owe.

    It seems to me that Wamu financed the “money making” side of their business (retail) from the horrendously bad lending side of their business. So they were never really making money, they were just deferring losses until a future date, which is now.

    Just my 70,000 billion cents…

  41. 41
    Civil Servant says:

    I’m giving blood this afternoon. The last time I did, my phlebotomist had just bought a couple thousand shares of WaMu, he told me, at some crazy low price, I forget the number. He urged me to do the same and told me that he’d been giving the same advice to everyone all day. I must have seemed resistant, because he got a bit cross with me. “What do you think is going to happen?” he snapped. “It’s WaMu, it’s only going back up.” I hope I get a different phlebotomist today.

  42. 42
    CCG says:

    “More important.. JP is only buying the deposit accounts/etc. What happens to the billions of dollars of bad mortgages? Do those become the responsibility of the government?”

    Replace “government” with “taxpayers”

    “The $1 trillion bailout will not stop the housing slide because it ultimately will not be enough to restore liquidity.”

    Not a liquidity problem, a solvency problem. Unprecedented debt was created, which might have been okay if it was spent on unprecedented creation of real goods and services that could have paid it off. Instead it was spent on an unprecedented pyramid scheme, and will never be paid off.

    “Banks will buy Treasury notes and other such relatively safe investments to brace for further declines as opposed to writing risky loans in a collapsing housing market. While we would expect inflation to take off like mad dogs from all of the money being printed, the bulk of that money will be held by the banks and will not circulate within the economy. Thus, we will see massive deflationary pressure offset the inflationary pressure. House prices will continue to fall, and the crisis will be slow and drawn out. A typical recession is followed by rapid expansion once economic cleansing takes place. But the slow drawn out economic collapse created by Paulson will lead to economic stagnation for years to come.”

    Yep. Japan or the 1930s anyone?

    From Rothbard:

    “The Fed tried frantically to inflate after the 1929 crash, including massive open market purchases and heavy loans to banks. These attempts succeeded in driving interest rates down, but they foundered on the rock of massive distrust of the banks. Furthermore, bank fears of runs as well as bankruptcies by their borrowers led them to pile up excess reserves in a manner not seen before or since the 1930s.”

    and:

    “[T]he inflationary policies of [President Herbert] Hoover and [Federal Reserve Board Governor Eugene] Meyer proved to be counterproductive. American citizens lost confidence in the banks and demanded cash – Federal Reserve notes – for their deposits (currency in circulation rising by $122 million by the end of July), while foreigners lost confidence in the dollar and demanded gold (the gold stock in the United States falling by $380 million in this period). In addition, the banks, for the first time, did not fully lend out their new reserves, and accumulated excess reserves – these excess reserves rising to 10 percent of total reserves by mid-year. A common explanation claims that business, during a depression, lowered its demand for loans, so that pumping new reserves into the banks was only “pushing on a string.” But this popular view overlooks the fact that banks can always use their excess reserves to buy existing securities; they don’t have to wait for new loan requests. Why didn’t they do so? Because the banks were whipsawed between two forces. On the one hand, bank failures had increased dramatically during the depression. Whereas during the 1920s, in a typical year 700 banks failed, with deposits totaling $170 million, since the depression struck, 17,000 banks had been failing per year, with a total of $1.08 billion in deposits. This increase in bank failures could give any bank pause, especially since all the banks knew in their hearts that, as fractional reserve banks, none of them could withstand determined and massive runs upon them by their depositors. Second, just at a time when bank loans were becoming risky, the cheap-money policy of the Fed had driven down interest returns from bank loans, thus weakening banks’ incentive to bear risk. Hence the piling up of excess reserves. The more that Hoover and the Fed tried to inflate, the more worried the market and the public became about the dollar, the more gold flowed out of the banks, and the more deposits were redeemed for cash.”

  43. 43
    CCG says:

    Civil Servant: Looks like he was on the wrong side of the bloodletting this time.

    I knew someone who bought a pile of it back around 25 last year. In January (when it was under 15) he was grimly hanging on (and asking everyone for advice). I told him that if he couldn’t even stand up and deliver a fiery argument as to why he was in it (other than that it had looked cheap), then dump it. He probably didn’t, and was probably glad he didn’t when it spiked back above 20 going into February.

    Speculation is a cruel place.

  44. 44
    Dave0 says:

    I haven’t read all the comments, so someone may have talked about this already, but out of the same “morbid curiosity” that Tim had, I decided to keep my stock to see how the process works. I figured the worst case scenario is that I lose my total investment. Turns out that’s what happened. I just talked to my broker and they said that JP Morgan owes stockholders nothing, because the FDIC seized the bank charter before JP Morgan bought it. He said the best thing that could happen now is I sell the stock for pennies on the dollar when it opens up for trading again (likely Monday) on some tiny exchange (maybe Philadelphia Stock Exchange he said). I barely have enough equity at this point to cover the commissions, so I might just keep it around and see if anything happens. I wouldn’t be surprised if a class action lawsuit gets filed by stockholders with much larger holding than I because of the FDIC seizing control of the company, leaving stockholders with nothing, days after WaMu was putting out press releases saying they’re solid and stable until at least 2010. One thing’s for sure, I’m never investing in another company run by Alan Fishman, he’s on my black list.

  45. 45
    Nick says:

    I don’t think this makes any sense unless they are want to get a bigger piece of the $700B bailout by buying more bad mortgages. And given WAMU’s focus on CA and FL there is a lot of junk there. Maybe they agreed based on the sense earlier today that a bailout deal had been struck?

    Bingo. Like Buffet, JPM is just trying to do what makes the most business sense in the current environment. Right now it’s a losing proposition which might have an upside in a few years in terms of market coverage and economy of scale. However, if the government does as expected and spends nearly a trillion dollars buying junk bonds based on junk mortgages at fantasy value to “inject capital” into failing banks (read: give them taxpayer money), this could have a huge upside for JPM. Instead of taking $30+ billion in write-downs, they can get cash from taxpayers and realize a huge windfall (and probably pay billions in executive bonuses for the brilliant maneuver). It’s just a shrewd business move to take advantage of our idiotic government.

  46. 46
    CCG says:

    “Already pulled my money out a couple of weeks ago. Certainly dont own any WM stock. For chrissake the writing was on the wall for a long long time.”

    Specifically, since about April 2007:

    http://market-ticker.denninger.net/archives/2007/04/18.html

    “WaMu Option Arm Capitalized Interest – And Why Its DANGEROUS

    I keep getting people asking me why I am so against companies like Washington Mutual (WM) booking back capitalized interest as income – basically, the deficiency on “Pay Option” ARM mortgages.

    This is the same sort of crap that sunk Lucent and Enron – booking “income” that is not in fact spendable, as it has an impairment associated with it (the LTV is INCREASED by this negative amortization) AND it is not CASH!”

    http://globaleconomicanalysis.blogspot.com/2007/04/wa-mu-accounting-playbook.html

    “So…… Wa-Mu “expects both NPAs [non-performing assets] and charge-offs to increase” and right in the face of rising credit card losses boosted earnings by lowering loan loss provisions by $110 million. In addition, a rise in negative amortizations added $361 million in questionable profit to their earnings. The former amounts to approximately 12 cents per share and the latter approximately 40 cents per share. In other words, 52 cents out of the reported 86 cents is quite suspect.

    Managed Earnings

    Q: Why might Wa-Mu have wanted to pull this stunt?
    A: They needed every bit of it to beat analysts’ expectations by 2 cents.”

  47. 47
    Euro says:

    Matthew: “The FDIC has 45 billion dollar left on their balance sheet. Wamu has deposits of 182 billion. Do the math.”

    Do what math? Please…

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