- The Washington Times - Friday, September 26, 2008

NEW YORK

JPMorgan Chase & Co. came to the rescue of ailing Washington Mutual on Thursday, buying the nation’s largest thrift after WaMu was seized by the Federal Deposit Insurance Corp. (FDIC) in the largest bank failure in world history.

This is the second time in six months that JPMorgan Chase has taken over a major financial institution crippled by bad bets in the mortgage market.

The deal will cost JPMorgan Chase $1.9 billion, and the bank said in a statement that it planned to write down WaMu’s loan portfolio by about $31 billion. JPMorgan Chase, which acquired Bear Stearns Cos. last March, also said it would sell $8 billion in common stock to raise its capital position.

WaMu’s account holders are in no danger, but its stockholders will suffer heavy losses.

The FDIC, which insures bank deposits, said it would not have to dip into the insurance fund as a result of the seizure. There had been concerns that the fund, which took a big hit after the seizure of IndyMac Bank, could be depleted by a WaMu seizure.

The Seattle-based WaMu, the nation’s largest thrift, has roughly $310 billion in assets and was searching for a lifeline after piling up billions of dollars in losses because of failed mortgages. WaMu has seen its stock price plummet by 87 percent this year, and it suffered a ratings downgrade by Standard & Poor’s earlier this week that put it in danger of collapse.

The Bush administration’s proposal for a $700 billion bailout for distressed financial institutions was thought to have given fresh impetus to a buyout and new allure to Washington Mutual. Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain’s Banco Santander and Toronto-Dominion Bank of Canada were all mentioned as possible suitors. WaMu was also thought to be talking to private equity firms.

The FDIC was seeking a buyer will to bear a large burden of WaMu’s losses, to lessen the impact on the insurance fund.

In a statement, JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt and preferred stock of Washington Mutual’s banks, or any assets or liabilities of the holding company, Washington Mutual Inc.

JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states.

Washington Mutual ran into trouble after it got caught up in the booming part of the mortgage business that made loans to people with bad credit, known as subprime borrowers.

Troubles spread to other parts of WaMu’s home loan portfolio, namely its “option” adjustable-rate mortgage (ARM) loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.

Problems in WaMu’s home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.

At the start of 2007, after the release of the company’s annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans.

As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.

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