While the Nation focused on the contentious negotiations over the $700 billion bailout of the financial market a giant oak fell quietly in the forest. The FDIC seized Washington Mutual on Thursday afternoon, and immediately sold their assets to JP Morgan for $1.9 billion.

Washington Mutual, a $307 billion bank established in 1889, becomes the largest failure in history--dwarfing IndyMac's $32 billion failure in July.

JP Morgan Assists FDIC

In an obviously coordinated effort, JP Morgan saved the FDIC from wiping out it's insurance fund by scooping up the thrift's assets, including all of the deposits.

For their $1.9 billion JP Morgan gets WaMu's 5,400 retail branches in 23 states, all its deposits, and gets to leave behind its senior unsecured debt, subordinated debt, and preferred stock as well as the assets and liabilities of the holding company--including several lawsuits.

This places an excellent brand, retail infrastructure, and heavily discounted assets into JP Morgan's growing operation--now the second largest bank behind Bank of America.

Jamie Dimon reflected the confidence in their deal for WaMu in a statement on Thursday, "This is a fabulous franchise. We think we got this at a price that protect us, where if we are wrong, it still protects us."

Washington Mutual was Ticking Time Bomb

Under rumors of unsteadiness WaMu customers have withdrawn $16.7 billion from accounts since Sept 16. According to FDIC Chair Sheila Bair's statement on a conference call, WaMu bank branches will open on schedule Friday morning giving customers access to all of their deposits.

This run on deposits, a 95 percent loss in stock value in the last year, and the recent downgrade of their credit rating to junk status crushedWaMu under the weight of its enormous impaired mortgage portfolio. These series of events and $19 billion in forecasted losses in its mortgage portfolio put WaMu on the purchase block.

Others Passed on WaMu

Citigroup, Wells Fargo, Banco Santander SA, Toronto-Dominion, and several private equity firms also looked at the deal. Presumably loan losses were still a major consideration even at a steep discount. This seems to be the same circumstance that Treasury SecretaryPaulson is warning about in his $700 billion proposal--these mortgage assets are illiquid.

Customers will Feel Effects

As banks like JP Morgan consolidate and hedge against growing losses in mortgage assets credit will continue to tighten. Jamie Dimon said in his statement yesterday afternoon that they continue to operate without assumption of the $700 billion fund to buy "bad" assets. This simply means that the few financial institutions will continue to write down mortgage assets and tighten credit to retain cash to cover potential losses.

While deposits continue to be safe, consumers are losing confidence and withdrawing funds from shaky banks. This is accelerating collapses like IndyMac and WaMu.

Meanwhile, getting a mortgage loan and potentially other credit (i.e., auto, credit cards) is going to become increasingly difficult without some form of government intervention.

Published on September 26, 2008