It is official, Washington Mutual Bank has failed. I’ll tell you what that means and what’s next for WaMu, coming up next on this special extended audio-only edition of 2MinuteFinance.
Tonight, the Federal Deposit Insurance Corporation, or the FDIC, took over Washington Mutual Bank and sold it to JP Morgan Chase. It is considered the largest bank failure in US history. So what happened?
The company was heavily invested in sub-prime mortgages. Because of the declining home values, WaMu was stuck with an investment that was now worth less than they had originally leant. In order to make sure they had enough cash on hand to make up for the loss on their mortgage investments and meet their obligations to depositors (like you an I), the bank tried to seek capital, also known as raising more money.
They did so last spring and raised $7 billion dollars. Unfortunately, their mortgage losses continued to mount. As of tonight, WaMu had $227 billion dollars in real estate loans, $307 billion dollars in assets, and $188 billion in deposits. Though since September 15th, depositors have taken out $16.7 billion dollars in deposits, or about 9% of the bank’s deposits. This tipped WaMu from being a solvent bank, or being able to meet all of its obligations, to being insolvent, or not being able to meet all of its obligations.
Tonight, the FDIC took over WaMu and immediately sold part of the company to JP Morgan Chase, also known as JPMC, for $1.9 billion dollars. So what does this sudden transition mean?
If you’re a WaMu bank customer, this means nothing for you. JPMC has assumed all deposits, including uninsured deposits. Meaning, even if you had more than the $100,000 dollar FDIC insurance limit in deposits with WaMu, JPMC will honor your deposits. You WILL receive every dollar you had originally deposited in WaMu. Come Friday morning, it will be business as usual.
If you’re a WaMu borrower, you’re not off the hook! No no no! You still have to pay back your loans and mortgages. Keep sending them to the same address on-time.
If you’re a WaMu employee, the future is not certain. JPMC has indicated that it would close less than 10% of the bank’s branches. So there would be some small jobs losses in the retail banking side. But the future of the other divisions of WaMu is uncertain.
If you’re a WaMu stockholder or bondholder, you are basically wiped out. Because JPMC bought WaMu from the FDIC and not the shareholders, and because they only bought the assets of WaMu, the stock is basically worthless and their bonds will not be repaid. So if you’re looking at the timeline of events, WaMu failed first, rendering the stock worthless, then the FDIC took over the bank, then JPMC bought the bank, all tonight. In the hierarchy of who gets repaid after a bankruptcy, shareholders and bondholders sit at the bottom of that list.
So what’s next for WaMu?
As mentioned earlier, JPMC has indicated they would close less than 10% of WaMu’s branches. As long speculated, the company has always wanted to enter the retail banking market in the west coast. As of right now, JPMC’s retail banking network is only in the east coast. As of this moment, the combined bank is now the largest bank in the United States with 5,400 branches in the US in 23 states. That is, until Bank of America completes their acquisition of Merrill Lynch in the near future.
So if you’re a WaMu customer, you’ll probably have greater access to your money in the near future, coast-to-coast.
The only question now is what is going to happen with all of WaMu’s losses. Will the government hold onto the losses, an idea floated with the current bailout plan? Will they help private companies take over the bad debt? Who knows? The only thing for certain is that JPMC will take a $31 billion dollar write down and sell an additional $8 billion dollars in stock to cover themselves against future losses.
For more information on the JPMC-WaMu failure and subsequent acquisition, visit our website at 2MinuteFinance.com. I’m Bobby Lee, thanks for listening.