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JPMorgan buys indebted Washington Mutual for $1.9 bn

JPMorgan buys indebted Washington Mutual for $1.9 bn
AFP
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First Published: Fri, Sep 26 2008. 09 58 AM IST
Updated: Fri, Sep 26 2008. 09 58 AM IST
Washington: The US government on Thursday closed struggling Washington Mutual, one of the country’s largest savings and loans banks, allowing JPMorgan Chase to buy its operations for $1.9 billion.
In the deal announced by the US Federal Deposit Insurance Agency (FDIC) late Thursday, banking giant JPMorgan Chase acquired the deposits, assets and some liabilities of the bank based in Seattle, Washington.
Washington Mutual, incorporated in 1889 in the west coast city, had been seen as heavily exposed to the mortgage crisis sweeping the country, and its shares had dropped some 85% this year.
Observers have speculated for months that it would be the next victim of the economic firestorm which has engulfed financial institutions across the country, sparking global turmoil.
The news came as US lawmakers were trying to hammer out an unprecedented $700 billion rescue plan, which if agreed would be the largest Wall Street bailout since the Great Depression of the 1930s.
The purchase of Washington Mutual, known as WaMu, which had about $188 billion in deposits, creates the largest US depository institution with more than $900 billion in customer deposits, JPMorgan Chase said.
Earlier this year, the banking giant also took over Bear Stearns, which had been one of the most high-profile victims of the US subprime property crisis.
In May, Bear Stearns shareholders approved a deal selling the former 85-year-old investment giant for a bargain-basement price of one billion dollars, concluding a deal engineered in March by the Federal Reserve.
FDIC chairman Stella Blair offered assurances that all customers of Washington Mutual, which billed itself as the “bank for everyday people, focusing on middle-market consumers and small businesses,” would be protected.
Before Thursday’s announcement, Washington Mutual was still worth some $2.9 billion on the stock market.
But according to recent estimates by the ratings agency Standard & Poor’s it owed some 14.4 billion dollars in debt.
JPMorgan Chase said the deal would add some 5,400 agencies to its chain, and specifically boost its presence on the Pacific coast.
The deal would add some 0.50 cents to its share values in 2009, JP Morgan Chase added, saying it expected to incur pretax merger costs of some $1.5 billion.
Earlier this month, Standard & Poor’s and Fitch lowered their ratings of WaMu’s holding company, after Moody’s Investors Service downgraded its debt to non-investment or “junk” status, complicating plans to raise fresh capital.
Even as the housing market was spiraling into a crisis, Washington Mutual continued to increase its reserves for bad debt, which hiked from $1.53 billion in the fourth quarter of 2007 to 10.3 billion nine months later.
The Financial Times reported last week that deposits have dropped by $5 billion dollars since June - a sign of panic which could see a rush on the bank as account holders line up to withdraw their money.
The US government “needed to find a buyer for WaMu because a takeover by the Federal Deposit Insurance Corporation would have dealt a crushing blow to the government’s deposit insurance fund,” the New York Times reported late on Thursday.
The FDIC - created in 1933 during the Great Depression following a raft of bank failures - guarantees the safety of up to $100,000 of individual money deposited in member banks.
Several bidders had expressed interest in purchasing WaMu, including Citigroup, Wells Fargo, Spain’s Banco Santander, HSBC of Britain, and TD Dominion of Canada, the Times reported.
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First Published: Fri, Sep 26 2008. 09 58 AM IST