WaMu is seized in largest bank failure in U.S. history

Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual, the nation's largest savings and loan, with $307 billion in assets, to JPMorgan Chase & Co., for $1.9 billion.

The move removes one of the most troubled U.S. banks from the financial landscape while mitigating another potentially huge taxpayer bill for a rescue.

Customers of Seattle-based WaMu are unlikely to be affected, although shareholders and some bondholders will be wiped out. WaMu account holders are guaranteed by the Federal Deposit Insurance Corp. (FDIC) up to $100,000.

By taking on all of its troubled mortgages and credit loans, JPMorgan will absorb at least $31 billion in losses that would normally have fallen to the FDIC.

JPMorgan Chase -- which acquired Bear Stearns only six months ago in another shotgun deal brokered by the government -- is to take control today of all of WaMu's deposits and bank branches, creating a nationwide retail franchise behemoth that rivals only Bank of America.

But JP Morgan will also take on Washington Mutual's big portfolio of troubled mortgage and credit card loans. The failed bank was only a minor player in the Minnesota mortgage market.

JP Morgan plans to shut down at least 10 percent of the combined company's 5,400 branches in markets. It also plans to raise an additional $8 billion by issuing common stock today to pay for the deal.

Washington Mutual is by far the biggest bank failure in history, eclipsing the 1984 failure of Continental Illinois National Bank and Trust in Chicago, an event that presaged the savings and loan crisis. IndyMac, which was seized by regulators in July, was a tenth the size of WaMu.

"This institution was a big question mark about the health of the deposit fund," Sheila C. Bair, the chairwoman of the FDIC, said of WaMu on Thursday. "It was unique in its size and exposure to higher risk mortgages and the distressed housing market. This is the big one that everybody was worried about."

The seizure and the deal came as a shock to Washington Mutual's board, which was kept in the dark: the company's newly minted chief executive, Alan C. Fishman, was in flying from New York to Seattle at the time the deal was brokered, according to these people.

Move spares FDIC funds

As with Lehman Bros., the government allowed Washington Mutual to fail because it was less entangled with the rest of the financial system than a behemoth like American International Group Inc., which the government spent $85 billion to take over last week while it faced collapse. On Sunday, the government approved emergency measures to help stabilize Goldman Sachs and Morgan Stanley.

Federal regulators had been trying to broker a deal for Washington Mutual because a takeover by the FDIC would have dealt a crushing blow to the federal government's deposit insurance fund. The fund, which stood at $45.2 billion at the end of June, has been severely depleted from the sudden collapse of IndyMac Bank. Analysts say that a failure of Washington Mutual would cost the fund upward of $20 billion or $30 billion.

The deal will end WaMu's run as an independent company, but stabilize the bank's finances and shore up its balance sheet, crippled by a toxic mortgages.

A recent fall from grace

Until recently, Washington Mutual was one of Wall Street's strongest performers. It reaped big profits quarter after quarter as its then chief executive, Kerry Killinger, enlarged its footprint by buying banks on both coasts and ramping up mortgage lending.

His goal was to transform what was once a sleepy Seattle thrift into the "Wal-Mart of Banking," which would cater to lower- and middle-class consumers that other banks deemed too risky. It offered complex mortgages and credit cards whose terms made it easy for the least creditworthy borrowers to get financing. WaMu even rolled out Starbucks-style kiosks to reduce waiting times.

With this grand plan, Killinger built Washington Mutual into the sixth-largest bank in the United States, with roughly 2,300 consumer and small business branches, total assets of $310 billion, and total deposits of $182 billion.

But underneath the hood, the bank's machinery was failing. Even as it grew in size, it underinvested in the technology needed to gauge how its vast loan operation was performing. Killinger, who once boasted of the giant he had created, struggled to integrate the many banks he had picked up. Near the top of the housing market, WaMu had nine different mortgage underwriting systems.

Then the housing market began to crumble. The bank tried to hedge its mortgage bets -- but did so poorly. It retrenched on its ranch-building ambitions. But none of that was enough to deflate ballooning losses on mortgage loans.