Friday, September 26, 2008

Biggest bank failure in US history

Washington Mutual has been acquired by JP Morgan Chase for $1.9 bn. Morgan acquires all assets and deposits but not equity and debt claims. In other words, equity holders and non-deposit lenders get wiped out.

This wasn't a straight acquisition- WaMu was seized by the regulators and then sold. JP Morgan pays $1.9bn to the regulator, not to the existing shareholders. It isn't clear why the regulator is getting paid because there are no costs of deposit insurance the regulator is bearing.

WaMu had assets of $307 bn- far in excess of the $40 bn held by Continental Illinois which failed in 1984. This makes it the biggest bank failure in US history by a wide margin.


Adorable Bad Guy said...

Watched the first US Presidential debate between the two candidates. I must confess, neither of them seemed prepared to handle current financial crisis.

I'm not sure if politicians can solve this problem(as they are clearly struggling to do) that has spooked even the most seasoned fin wizards.

Anonymous said...

Sir, It is my understanding that the the regulator took over only Wamu, and not the holding company. The $1.9B will go the holding company to be used towards settling the claims of debt holders, who will get a few cents on the dollar. The equity holders including preferred share holders will, of course, get wiped out. JP Morgan took over all the assets of the bank (including all the toxic waste) and all the liabilities (including the uninsured deposits). This transfer did not cost a dime to the FDIC. It is my understanding that the FDIC did it this way in haste to avoid leaks that might have caused a panic run on the bank. This achieved a smooth transfer of control of the operating bank to JP Morgan.

Anonymous said...

Sir, I made a comment on your blog regarding AIG in which I said that the government took over AIG because of its implication to the entire system (the counter parties, and customers of CDS contracts). In doing this, AIG shareholders were wiped out and thus paid for the risk. But, this action ended up saving those counter-parties including Goldman Sachs, which according to some estimates, had a $20 Billion exposure. I think everyone involved in the vast unregulated CDS market (including hedge funds) who were using CDS contracts for speculative purposes than for hedging or risk management should have faced the consequences of their risky bets. I am now of the view that the government should not have intervened and should have left AIG fail. I am also concerned by the reports that Goldman's CEO was in the room with the Treasury Secretary during the discussions prior to govt takeover. This raises the appearance of conflict of interest. There is an article on the business section of the NY Times on this.