Washington Mutual:
Biggest bank failure in American history, yesterday
By Jon Fernquest |
Yesterday saw the largest bank failure in American history.
Washington Mutual (WaMu), 119-years old and the largest savings and loan bank in the United States ($307 billion in assets), was seized by a US banking regulator and sold to JP Morgan Chase for $1.9 billion. WaMu shareholders and some bondholders will be "wiped out" (Read statement by regulator that seized the bank).
JP Morgan takes control of all of WaMu’s deposits and bank branches (5,400 in the US) making it overnight a retail banking giant second only to the Bank of America. JP Morgan will issue $8 billion in common stock to pay for the deal.
Events have moved quickly during the last week. A week ago JP Morgan Chase was one of the top two investment banks in the US. As of last Sunday the firm was given permission to turn itself into a regular deposit-taking bank in order to survive.
There was a risk that the FDIC would have to pay as much as $31 billion to rescue WaMu's depositors. Yesterday's takeover deal ends this risk. Swift action may have prevented a bank run (See photo on right).
Washington Mutual was "unique in its size and exposure to higher risk mortgages and the distressed housing market." The Federal Deposit Insurance Corporation (FDIC) is the US government agency that insures bank deposits up to $100,000. The FDIC had $45.2 billion in reserves as of June but a lot of that was used to pay off depositors after the failure of IndyMac Bank in July. IndyMac was one tenth the size of WaMu (Read statement by FDIC).
The Washington Mutual is the largest bank failure in American history, bigger even than the 1984 failure of Continental Illinois National Bank and Trust that began the US Savings and Loan Crisis in the 1980s.
(Photo on right is of a bank run during the panic of 1873 in New York City at the Fourth National Bank, No. 20 Nassau Street)
From wild success to utter failure
For years Washington Mutual made big profits buying up banks all over the US and expanding its home mortgage loan portfolio.
The goal was to make Washington Mutual into the "Wal-Mart of banking" with loans to lower-income borrowers that were too risky for other banks. The bank extended its business into big cities like Chicago, New York, and Los Angeles. WaMu was also involved in a scandal in which home appraisers inflated the value of homes (Read article).
Kerry Killinger, the bank's high-flying CEO, built Washington Mutual into the sixth-largest bank in the United States.
With the Subprime crisis and the collapse of the US housing market WaMu began to lose large amounts of money in its mortgage home loan business and also in it's credit card business. Nothing could "defuse ticking time-bombs like interest-only and pay-option amortization products that had reeled in bottom-grade borrowers."
Private equity tries to save the bank
As things got worse at the bank in March 2008, CEO Killinger tried desperately to get help from other banks and private equity firms:
With options narrowing, WaMu frantically reached out to several banks and big private equity firms, including the Carlyle Group and the Blackstone Group. In March, JPMorgan Chase saw an opportunity and urged WaMu in a letter to consider a quick deal. On the same weekend that JPMorgan’s chief executive, James Dimon, negotiated his daring takeover of Bear Stearns, he secretly dispatched members of his team to Seattle to meet with WaMu executives. When JPMorgan Chase offered WaMu $8 a share, largely in stock. But Mr. Killinger balked at the deal.In April, David Bonderman, a founder of the TPG private equity firm, and a group of institutional investors agreed to infuse $7 billion of capital into the bank. Mr. Killinger kept his job, and Mr. Bonderman, who had served as a WaMu director from 1997 to 2002, returned with a board seat and 176 million WaMu shares priced at about $8.75 each — steep discount of more than 25 percent to that day’s share price.
While the deal was sweet for Mr. Bonderman, it eroded the value for existing shareholders, enraging them. They moved on June 2 to strip Mr. Killinger of his chairmanship. Mr. Bonderman, meanwhile, watched his golden bet turn to dross. In a statement Thursday, the fund said: "Obviously, we are dissatisfied with the loss to our partners from our investment in Washington Mutual."
In the end, the shareholders were left with nothing.
(Source: New York Times, 26-09-08, Government Seizes WaMu and Sells Some Assets, ERIC DASH and ANDREW ROSS SORKIN, link)
Vocabulary:
JP Morgan Chase - last week one of two remaining investment banks in the United States, this week given permission to become a deposit-taking commercial bank (See Wikipedia)
Washington Mutual - (See Wikipedia and NY Times bank history and articles)
Kerry Killinger - CEO of Washington Mutual from 1990 until September 8, 2008, built Washington Mutual into the sixth largest bank in the United States, named 2001 Banker of the Year by American banker magazine (See Wikipedia)
wiped out - destroyed, no longe exists
retail banking - banking services to small account holders offered through bank branches such as savings and checking accounts and personal loans (See Wikipedia)
Bank of America - the largest commercial bank in the United States by deposits and market capitalization (See Wikipedia)
common stock - stock shares that receive a share of the profits (dividend rights) and can vote to select the board of directors to govern the corporation (voting rights)
preferred stock - stock shares with dividend rights that are higher priority than common stock but no voting rights
investment bank -this type of bank helped companies and governments by raising money through issuing and selling securities in the capital markets (both equity and bond), as well as providing advice on transactions such as mergers and acquisitions, this type of bank no longer exists as of Sunday this week (See Wikipedia)
bank run - when many bank depositors suddenly take fright and try to withdraw their money from a bank (See Wikipedia)
exposure to higher risk mortgages - held a lot of home loans that were having problems, therefore ran risk of losing lots of money
distressed housing market - houses that borrowers are having difficulties paying back their loans on
Federal Deposit Insurance Corporation (FDIC) - the US government that insures bank deposits up to $100,000 (See Wikipedia)
reserves - special money held for use in emergency situations
home appraisers - experts who estimate the value of homes and real estate
high-flying - successful in their career
defuse a bomb - stop a bomb from exploding
interest-only and pay-option amortization product - substandard loan practices that contributed to the subprime crisis (See Wikipedia on Option ARMS, interest only loans, and negative amortization)
reel in Y - catch a customer (like catching a fish by "reeling" in the fishing line)
reeled in bottom-grade borrowers - catch low quality customers
private equity firms - firms that privately own businesses and therefore can keep a lot of the information about their firm private and hidden from the public (non-public equity, an equity investment in a company that is not traded on a public stock market) (See Wikipedia)
tried desperately - trying anything because you are in such a bad situation
frantically- behaving in a wild and uncontrolled way because you are frightened
frantically reached out to Y - asked Y for help (while in a state of extreme fright)
options narrowing - fewer choices possible
Carlyle Group - a global private equity investment firm, based in Washington, D.C., with more than $89 billion of equity capital under management (See Wikipedia)
Blackstone Group - among the most prestigious private equity and investment management firms in the world, part of the migration of companies from public to private hands, a total of some US$370 billion in deals in the United States in 2006 (See Wikipedia)
dispatched members of his team to Seattle - sent members of his team to Seattle
balk - definitely do not want something to happen, think it is ridiculous
balked at the deal - definitely did not want to do the deal
TPG private equity firm - a private equity investment firm with an industry focuses on consumer/retail, media and telecommunications, industrials, technology, travel/leisure, and health care, Euromoney named the firm Best Global Private Equity House in 2006, a year in which it was involved in deals that comprised a record $101 billion (See Wikipedia)
institutional investors - an organization whose main purpose is to invest large amounts of money, this includes mutual funds, banks, pension funds, insurance companies, and universities
eroded the value for existing shareholders - reduced the value of existing stock, existing shareholders lost money
dross - something that has no value, very low quality
watched his golden bet turn to dross - the decision they made lost money
