Washington Mutual is largest US bank failure

Washington Mutual, the largest US savings and loan, was closed by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. Customers should expect business as usual on Friday, the FDIC said.

The bailout came after the thrift suffered deposit outflows of 16.7 billion since September 15, the OTS said.

8220;With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,8221; the OTS said.

Seattle-based Washington Mutual has about 307 billion of assets and 188 billion of deposits, regulators said. The nation8217;s largest previous banking failure was Continental Illinois National Bank 038; Trust, which had 40 billion of assets when it collapsed in 1984.

The transaction gives JPMorgan roughly 5,400 branches, and fulfills JPMorgan Chief Executive Jamie Dimon8217;s long-held goal of becoming a retail bank force in the western United States.

It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price.

8220;Jamie Dimon is clearly feeling that he has an opportunity to grab market share, and get it at fire-sale prices,8221; said Matt McCormick, a portfolio manager at Bahl 038; Gaynor Investment Counsel in Cincinnati. 8220;He8217;s becoming an acquisition machine.8221;

On a conference call, JPMorgan said the transaction will add to earnings immediately, and result in 1.5 billion of annual cost savings, including from the closure of less than 10 per cent of the combined company8217;s branches. He also said JPMorgan plans to issue 8 billion of stock.

The acquisition does not cover Washington Mutual8217;s equity, senior debt and subordinated debt holders, the FDIC. The FDIC said the transaction will not affect its roughly 45.2 billion deposit insurance fund.

The transaction also comes as Washington wrangles over the fate of a 700 billion bailout of the financial services industry, which has been battered by mortgage defaults and tight credit conditions, and evaporating investor confidence.

8220;It removes an uncertainty from the market,8221; said Shane Oliver, head of investment strategy at AMP Capital in Sydney. 8220;The problem is that markets are in a jittery stage. Washington Mutual provides another reminder how tenuous things are.8221;

Washington Mutual8217;s collapse is the latest of a series of takeovers and outright failures that have transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

These include the disappearance of Bear, government takeovers of mortgage companies Fannie Mae and Freddie Mac and the insurer American International Group Inc, the bankruptcy filing of Lehman Brothers Holdings Inc, and Bank of America Corp8217;s planned purchase of Merrill Lynch 038; Co.

JPMorgan, based in New York, ended June with 1.78 trillion of assets, 722.9 billion of deposits and 3,157 branches. Washington Mutual had 2,239 branches and 43,198 employees.

Shares of Washington Mutual plunged 1.24 to 45 cents in after-hours trading after news of a JPMorgan transaction surfaced. JPMorgan shares rose 1.04 to 44.50 after hours.

119-YEAR HISTORY

The transaction ends exactly 119 years of independence for Washington Mutual, whose predecessor was incorporated on September 25, 1889, 8220;to offer its stockholders a safe and profitable vehicle for investing and lending,8221; according to the thrift8217;s website. This helped Seattle residents rebuild after a fire torched the city8217;s downtown.

It also follows more than a week of sale talks in which Washington Mutual attracted interest from several suitors.

These included Banco Santander SA, Citigroup Inc, HSBC Holdings Plc, Toronto-Dominion Bank and Wells Fargo 038; Co, as well as private equity firms Blackstone Group LP and Carlyle Group, people familiar with the situation said.

Less than three weeks ago, Washington Mutual ousted Chief Executive Kerry Killinger, who drove the thrift8217;s growth as well as its expansion in subprime and other risky mortgages, and replaced him with Alan Fishman, the former chief executive of Brooklyn, New York8217;s Independence Community Bank Corp.

The transaction also appears to be a costly defeat for David Bonderman and his private equity firm TPG Inc, the lead investor in a 7 billion capital raise by the thrift in April. TPG was unavailable for comment.

Washington Mutual8217;s roughly 227 billion book of real estate loans put the thrift at the top of the critical list of US lenders, analysts said. More than half of this portfolio was in home equity loans and in adjustable-rate mortgages and subprime mortgages that are now considered risky.

Thursday8217;s transaction makes JPMorgan close in size to Citigroup, now the largest US bank by assets.

JPMorgan has surpassed Bank of America in size. That bank would become the largest US bank once it completes its planned purchase of Merrill Lynch, expected in the first quarter of 2009.

DIMON POUNCES

The deal is the latest ambitious move by Dimon.

Once a golden child at Citigroup before his mentor Sanford 8220;Sandy8221; Weill engineered his ouster in 1998, Dimon has carved for himself something of a role as a Wall Street savior.

Dimon joined JPMorgan in 2004 after selling his Bank One Corp to the bank for 56.9 billion, and became chief executive at the end of 2005. While results have been hurt by the credit crisis, JPMorgan has suffered less than many rivals.

Some historians see parallels between him and the legendary financier John Pierpont Morgan, who ran J.P. Morgan 038; Co and was credited with intervening to end a banking panic in 1907.

Bank of America Chief Executive Kenneth Lewis has also been credited with helping reduce damage on Wall Street with his acquisitions this year of Merrill Lynch and Countrywide Financial Corp, the nation8217;s largest mortgage lender.

Washington Mutual has a major presence in California and Florida, two of the states hardest hit by the housing crisis. It also has a big presence in the New York City area.

The thrift amassed 6.3 billion of losses in the nine months ended June 30. It had also projected 19 billion of mortgage losses through 2011, but analysts said credit losses could reach as high as 30 billion.

8220;It is surprising that it has hung on for as long as it has,8221; said Nancy Bush, an analyst at NAB Research LLC.