Washington Mutual Fails

For WaMu the Government bailout will be too little too late. Its possible that JP Morgan Chase, however will may get a healthy slice of the $700 billion pie.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then almost immediately sold off WaMu's banking assets to JPMorgan Chase & Co. for $1.9 billion. This is the second major purchase Chase has made this year; back in March Chase purchased Bear Sterens for nearly $1.5 billion.

WaMu, founded in 1889, now holds the dubious title of the largest bank to fail in US history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.

One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.

WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "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."

The bank's failue means that shareholders' equity in WaMu will be completely wiped out. The deal leaves private equity investors including the firm TPG Capital, which gave WaMu a cash infusion totaling $7 billion this spring, with nothing and no recourse.

JPMorgan Chase is in this to acquire assets, not liabilities. Chase said it was not acquiring any senior unsecured debt, subordinated debt, preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company. Basically they are just covering deposits and loans.

JPMorgan Chase, the second largest bank in America will not have more than 5,400 branches in 23 states. Its possible that the company will take advantage of economies of scale and close some competing branches, but Chase hopes to to close less than 10 percent of the two companies' branches.