Washington Mutual: The Largest Bank Failure in History

Friday the government seized the assets of Seattle's Washington Mutual (WM), affectionately known as WaMu. At the same time, the government brokered an emergency sale of most of the assets to JP Morgan Chase (JPM). The deal saves taxpayers and FDIC from another loss as JPM assumes the risk in exchange for the assets at a bargain basement price. WaMu customers should not be affected while shareholders and some bondholders will get nothing.

The failure of Seattle's Washington Mutual is the largest bank failure in history.

We knew Washington Mutual was in trouble because it has appeared high on the survey of "Best CD Rates" where it had the highest 5-year CD rate, currently at 5.0%, for some time. Troubled banks are paying high CD rates to attract capital at far better rates then they can get on Wall Street. For example, AIG (AIG)  is paying LIBOR plus 8% and 80% share dilution to the Government. The current LIBOR rate is 3.46% so AIG is paying more than double the rate WaMu pays for CDs. I suspect WaMu will continue to offer high rates to keep customers during the transition to JP Morgan Chase.

(See "Washington Mutual Bank Best CD Rates with FDIC" for current rates as of 9/23/08.)

WaMu was also #14 on "Dick Bove's List of Banks In Danger of Failing" under the category of "non performing assets as a percentage of equity" so we had plenty of warning in advance. Someone close to me cashed in their WaMu CDs last week, paid the penalty, reinvested $99,000 at WaMu for total FDIC protection of principal and interest until the dust settled then invested the remainder of the money in a new bank for to get full FDIC protection. The government acted before more people pulled their money out and created another run on a bank.

Jamie Dimon, Chairman and CEO of JP Morgan Chase said, "We think this builds a great franchise for us....We are building this franchise for the long term, not next year or the next five years but the next one hundred years."

Merrill Lynch: "The strategic fit is good and exactly what the company has long articulated it wanted, at a knock-down price which manages the risks. "

Deutsche Bank: "Earnings accretion (to JPM) is mostly offset by P/E dilution and a higher risk profile. Maintain Hold."

Disclaimer: I own and trade XLF, the financial sector ETF, around a core position that is well in the money for both my personal portfolio and "Kirk's Investment Newsletter Explore portfolio." JPM is the number two holding of XLF according to ETFConnect.com:

Holding As of 04/30/2008	% of XLF
Bank Of America Corporation	8.05
Jp Morgan Chase & Co	7.82
Citigroup Inc	6.08
American Intl Group Inc	5.02
Wells Fargo & Co New	4.78
Goldman Sachs Group Inc	3.67
Wachovia Corp New	2.91
Us Bancorp Del	2.87
American Express Co	2.8
Morgan Stanley	2.51

The best news is for taxpayers who won't have any loss from this deal.

Comments

[Ishortyou:]

in regards to Wachovia they are serveral tactics that it can apply to solve its book of business facing the main problem which is the run of the bank phenomena. Most of those run of the banks are from payrolls from small business and depositors of more than 100,000 dollars that are running like chickens without heads. 1. Wachovia is doing a good tactic on reassuring their depositors to install confidence in its business through phone calls, personal visits-contacts, adequate interest on deposits, etc, etc. 2. Now that the goverment is willing to buy bad assets on warrants, they can sell the trouble assets and delever quickly from them and sell part of their equity without stockholder dilution to the government to boost confidence. 3. Make a deal with FDIC of NO intervention as this is done. 4. Keep working on their good loans to boost capital/liability ratio as well as reducing business expenses. With this strategy is likely to succed.

2008 Sep 28 08:33 AM

[sbinvestor:]

I would like to know why the people (not the firms) responsible for this fiasco are not being investigatd? prosecuted? & imprisoned???

2008 Sep 28 11:39 AM

[Frank Miller:]

This is a very disturbing trend for our banks and government, but it should serve as a wake up call to all American investors. If you want to protect your money, you need to diversify and invest at least some of it overseas. These are hard times for American investing firms. I personally use offshore bank accounts and they have helped me with diversification and asset protection. If you want to read more on why offshore investing is smarter, feel free to visit my website.

Best,
Frank Miller
www.theoffshorebankacc...

2008 Sep 28 01:15 PM

[Kinabalu:]

"Jamie Dimon, Chairman and CEO of JP Morgan Chase said, "We think this builds a great franchise for us"

Another great deal for JPM. This is better than Bear Stearns. They must be paying someone off.

2008 Sep 28 07:44 PM

[Wamook:]

It's plain and simple. It's profiteering on a crisis. The whole financial climate was bad. This move by JPM&C makes it a lot worse and a lot more lasting for a lot more people. A very few large depositors moving their money toppled this bank. JPM used the countries financial crisis as a smoke screen for a mugging.

2008 Oct 09 09:40 AM