WASHINGTON — The government’s seizure and sale of Washington Mutual Inc. eases pressure on a federal fund that insures Americans’ bank deposits and places a high-stakes opportunity — with minimal risk — into the hands of JPMorgan Chase &Co. Inc.
The CEO of WaMu, Alan Fishman, is entitled to more than $13 million in severance and bonus pay. U.S. taxpayers, meantime, could end up shouldering billions of dollars worth of shaky mortgages and other investments that contributed to WaMu’s demise.
Such a scenario assumes the massive bailout proposed by Treasury Secretary Henry Paulson, or something like it, will be approved and JPMorgan will sell WaMu’s least desirable assets to the government.
For its $1.9 billion investment, JPMorgan gets control of the nation’s largest thrift — more than 5,000 branches in 23 states. It also assumes a highly stressed loan portfolio that could result in a $31 billion write-down.
But JPMorgan looks like a real winner in the deal.
Its $98.7 billion in capital assets put it in a good position to handle a financial hit, and it could limit such problems by taking advantage of a Paulson-like bailout plan.
“I don’t think they need the government bailout to make WaMu work,” said Len Blum, managing director of Westwood Capital. “They have the capital, they have the strength to hold those assets and take the write down.”
Blum also expects the bank to benefit from the bailout in a more indirect way — as strong banks will prosper in a more stable market environment.
Government officials downplayed WaMu’s failure Thursday, saying the purchase means customers don’t have to worry about the bank’s solvency any longer.
WaMu’s seizure by the government before the sale, however, means all shareholders’ equity in WaMu was wiped out. Seattle-based WaMu, founded in 1889, is the largest bank to fail by far in the country’s history. Its $307 billion in assets eclipse those of Continental Illinois National Bank, which failed in 1984 with $40 billion in assets; adjusted for 2008 dollars, its assets totaled $67.7 billion.
Because of WaMu’s souring mortgages and other risky debt, JPMorgan plans to write down WaMu’s loan portfolio by about $31 billion — a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.
JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world’s largest insurer, getting taken over by the government.
Its stock rose in midday trading Friday on the New York Stock Exchange, gaining $1.90, or 4.37 percent, to $45.36.
Jim Wilcox, a finance professor at the University of California Berkeley’s Haas School of Business, said he believes JPMorgan based its acquisition of WaMu on the assumption that a Paulson-like bailout plan would pass.
In a booming vote of confidence in JPMorgan’s action, investors bought 246.9 million new shares on Friday at $40.50 apiece, a 7 percent discount to Thursday’s closing price of $43.46. JPMorgan raised gross proceeds of $10 billion from the offering, well above the $8 billion it had originally planned to raise.
Ultimately, though, JPMorgan has taken a gamble.
There is still a risk that the bank will be forced to write down more than $31 billion on the troubled assets it acquired, said Donn Vickrey, co-founder of Gradient Analytics. “But I just think it’s a gamble worth taking and they have the capital to handle it if it does become worse,” he said.
Washington Mutual’s lucrative deposits outweigh any risk due to the write-down, Vickrey said. And, in the end, if the bank actually ends up making a little money on the loans, that’s just a bonus, he said.
For the Federal Deposit Insurance Corp., the near-term financial threat posed by WaMu’s failure drove the agency to expedite a seizure and sale.
“It was unique in its size and exposure to higher risk mortgages and the distressed housing market,” Sheila Bair, the chairman of the FDIC, said in a conference call Thursday. “This is the big one that everybody was worried about.”
The FDIC’s insurance fund, which depends on premiums paid by U.S. banks and thrifts, is at around $45.2 billion — below the minimum target level set by Congress. The fund took an $8.9 billion hit from the collapse of Pasadena, Calif.-based IndyMac, which had $32 billion in assets and some analysts had estimated that a failure of WaMu could cost the insurance fund tens of billions of dollars.
The size of the insurance fund is still a concern, however. Thirteen federally insured banks and thrifts have succumbed so far this year, and more are expected to fail as the mortgage crisis continues to reverberate across the industry.
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