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Friday, September 26, 2008

Washington Mutual Implodes, JP Morgan Takes All the Risk

“We don't know and we don't care.” –Jamie Dimon, CEO JPMorgan, about rival bids for WaMu,


We have a new record: Washington Mutual (WM) is the largest bank failure in U.S. history.

No surprise here. We all knew this one was a long time in coming.

JPMorgan Buys WaMu Deposits; Regulators Seize Thrift (Update1): “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.”

The thing to take away from this is that WM couldn’t even make it to ‘Bank Failure Friday’ and had to be shut down on a THURSDAY. That demonstrates just how quickly things can get that bad.

On September 15th I wrote FDIC Can’t Afford Washington Mutual Failure. This appears to have been true, because the failure and seizure of WM was done in such a way as to cost the FDIC nothing. Common equity will be wiped out as will all bond and note holders. (That could still change, but seems unlikely.)

“WaMu's balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses.”

JPMorgan has gobbled up WM… and with it all the risk as well. Don’t forget, everybody else took a look at WM and quietly backed away.

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.”

Is JP Morgan being reckless? Merrill Lynch (MER) and Washington Mutual (WM) may come with a few embedded balance sheet surprises…

“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.”

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