JPMorgan Chase Biggest U.S. Bank With Its Purchase of Failed WaMu

By Jennifer Yousfi
Managing Editor

JPMorgan Chase & Co. (JPM) became the largest U.S. bank, based on deposits, with its purchase of the most recent credit crisis casualty, Washington Mutual Inc. (WM)– the largest U.S. bank failure to date.

The federal Office of Thrift Supervision (OTS) shut down WaMu, as the thrift is popularly known, late last night (Thursday) and named the Federal Deposit Insurance Corp. (FDIC) as the receiver.

"With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business," the OTS said, Reuters reported.

WaMu put itself on the auction block late last week, but there were no bidders for the struggling thrift and its eventual collapse became a foregone conclusion. With $300 billion in assets, WaMu is the largest bank failure to date. It easily tops the previous record held by Continental Illinois National Bank and Trust Co., which had just $40 billion in assets at the time of its 1984 collapse.

“We are going to see a lot more bank failures before the cycle is all over,” Brian Horey, president of Aurelian Management LLC in New York, told Bloomberg News. “There are sufficiently large clusters of bad assets on a fair range of banks out there.”

WaMu shareholders are, of course, the big losers here as the stock guttered today (Friday), losing over 90% in value overnight. Shares are worth less than a quarter, far below WaMu stock’s 52-week high of over $36.

JPMorgan Chase, however, leap-frogged to the top of the list as the largest domestic bank, based on deposits, with its $1.9 billion purchase of the majority of WaMu assets, including $188 billion in depostis, could come out a big winner.

In March, WaMu rejected an offer from JPMorgan Chase in favor of a cash infusion from private-equity firm TPG Capital. That offer would have amounted to about $10 per share or approximately $17.1 billion.

Even with the rock bottom price for WaMu’s $300 billion portfolio, JPMorgan Chase Chief Executive Jamie Dimon forecasts a $31 billion writedown of WaMu’s riskiest mortgage assets.

But the bank raised $10 billion in capital through a recent stock sale to bolster its already strong balance sheet.

“We want to just maintain the same strong balance sheet and capital ratios going forward as we have in the past,” Dimon said on a conference call Thursday night, Bloomberg reported.

JPMorgan expects its Tier 1 capital ratio, a measure of the bank’s capital on hand, to be 8.3% by month-end. That’s a safe margin above the 6% that marks a “well capitalized” bank for regulators.

JPMorgan Chase has taken full advantage of the credit crisis to buy distressed assets at very attractive levels. In March, JPMorgan Chase scooped up failed investment bank The Bear Stearns Cos. Inc. for $10 per share.

News and Related Story Links:

• Bloomberg News:
  JPMorgan Raises $10 Billion in Stock Sale After WaMu

• Reuters:
  WaMu is largest U.S. bank failure

• Economist.com:
  From Whoo hoo to boo hoo

• Barron’s:
  Remarkable Course WaMu Took; Paulson Takes A Knee

• Bloomberg News:
  WaMu Seized by U.S., Assets Sold to JPMorgan in Record Failure

• 24/7 Wall St.:
  Why Washington Mutual (WM) Does Not Matter

• Wikipedia:
  Continental Illinois National Bank and Trust Co.

• Wikipedia:
  Tier 1 capital ratio

• Money Morning:
  The Government’s Financial Crisis Fix-it Plan Sends Stocks Soaring, Though Some Argue There’s no Quick Fix for this Disaster

• Money Morning:
  JPMorgan Raises Bear Stearns Bid