Federal Reserve seizes WaMu; auctions it to JPMorgan for $1.9 billion

26 September 2008

The largest bank failure in US history took place yesterday when federal regulators seized Washington Mutual and sold its branches, deposits and loans to its rival, the banking giant JPMorgan Chasefor around $1.9 billion  through a bidding process.

The acuisition makes JP Morgan, which four months ago acquired the failing investment bank Bear Stearns (See: US Fed clears JP Morgan's acquisition of Bear Stearns bank)  at a fire-sale price. the largest US depository institution with over $900 billion of customer deposits, financial services and the second-largest branch network in the US.

In the wake of the financial crisis, the Federal Reserve had been pressurising WaMu to sell itself as it was exposed to higher risk mortgages and had borne the brunt of the housing debacle. Although many envisaged interest but no one came forward with a concrete deal even as several deadlines issued by the Federal Reserve passed.

The US federal regulators were forced to take this drastic step as depositors who had lost confidence in the institution had withdrawn $16.7 billion in deposits since 15 September with the deposits having dropped below $135 billion from over $188 billion at the end of June, although the Seattle-based WaMu had assured investors just two weeks back that the bank had enough capital to deal with the losses accrued in the housing market loan portfolio.

The move also came as the US Congress failed to sign and dithered on Henry Paulson's $700-billion bailout fund designed to help ailing banks with its radioactive assets. (See: Bernanke implores Congressional support as $700-billion package faces opposition)

Seattle-based Washington Mutual has about $307 billion in assets and $188 billion of deposits and an estimated loss on loans of approximately $19 billion, although some analysts opine that that the loss cold be much higher.