Ouch.. Looks like this it isn't just bad loans, but poor confidence by clients who use banking services.
First the investment banks, and now the commercial banks.
Full article here:
http://online.wsj.com/article/SB122243718542978849.html?mod=googlenews_wsjWaMu Seized, Sold Off to J.P. Morgan;
Deal, Bailout Delay Rattle Investors
By ROBIN SIDEL, DAVID ENRICH and DAN FITZPATRICK
*
In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. late Thursday and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co.
On Friday, financial stocks and the broader market slumped as investors digested the WaMu news and the wrangling in Washington over a bailout plan. Besides WaMu, which tumbled 90% to 16 cents, Wachovia was among the weakest financials, slumping 24% to $10.35 and putting this week's losses at 45%. Wachovia, like WaMu, has a troubled mortgage portfolio and faces its own uncertain future.
Also Friday, J.P. Morgan priced the capital raising related to its WaMu deal and said it will sell $10 billion in stock -- $2 billion more than expected. The public offering is for 246.9 million shares of its common stock at $40.50 a share, a 6.8% discount to its closing price Thursday.
WaMu's Collapse
The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis. But the deal, as constructed by the Federal Deposit Insurance Corp., could hold some glimmers of hope for the beleaguered banking system because it averts any hit to the bank-insurance fund.
Instead, J.P. Morgan agreed to pay $1.9 billion to the government for WaMu's banking operations and will assume the loan portfolio of the thrift, which has $307 billion in assets. The full cost to J.P. Morgan will be much higher, because it plans to write down about $31 billion of the bad loans and raise $8 billion in new capital. All WaMu depositors will have access to their cash, but holders of more than $30 billion in debt and preferred stock will likely see little if any recovery.
The deal will vault J.P. Morgan into first place in nationwide deposits and greatly expand its franchise.
The seizure was another watershed event in a frenetic period for the U.S. banking system, and came while members of Congress debated the Bush administration's proposed $700 billion bailout package. The tally of U.S. financial giants that have either been seized by the government or sold themselves off to stronger firms in recent weeks includes mortgage titans Fannie Mae and Freddie Mac, insurer American International Group Inc., and Wall Street firms Lehman Brothers Holdings Inc. and Merrill Lynch & Co.
The failure of WaMu eclipsed what had long been America's largest bank bust on record, the 1984 collapse of Continental Illinois, which had $40 billion in assets.
The fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.
The seizure of Washington Mutual is likely to send tremors through the thrift industry. Many of WaMu's smaller brethren are also struggling with a wave of bad loans and some have already been ordered by regulators to raise capital and stop growing. Many community and regional financial institutions are also slashing dividends, selling branches and reining in lending in order to preserve capital.
WaMu has suffered huge losses but still boasts a strong deposit base and a network of 2,239 branches that bigger banks would have paid dearly for when times were good. In March, with the credit crisis in full bloom, J.P. Morgan offered to acquire WaMu but was spurned in favor of a $7 billion infusion led by the private-equity firm TPG, considered one of the savviest buyout firms. TPG, led by investor David Bonderman, said it will lose $1.35 billion, wiping out its investment.
This is the second time that J.P. Morgan, the second-largest U.S. bank in stock-market value, has been a buyer of last resort. In March, the New York company agreed to purchase Bear Stearns Cos., getting a $29 billion backstop from the federal government.
FDIC Chairman Sheila Bair said that WaMu's downward spiral "could have posed significant challenges without a ready buyer." Referring to J.P. Morgan's willingness to buy WaMu and absorb its shaky loans amid continuing debate over the $700 billion bailout package, she added: "Some are coming to Washington for help, others are coming to Washington to help."
While WaMu has been struggling since last year, its demise occurred with breathtaking speed.
Starting Sept. 15, the day that Lehman filed for bankruptcy protection, WaMu's customers began heading for the exits. Over the next 10 days, they yanked a total of $16.7 billion in deposits, according to the Office of Thrift Supervision. That was about 9% of the thrift's deposits as of June 30. WaMu declined to comment.
Melody Williams, 50 years old, said in the past 30 days she has moved about $25,000 out of Washington Mutual, spreading it to other financial institutions she thought were stronger, including Wells Fargo & Co. Ms. Williams, the controller for an architecture firm, said she thought that Washington Mutual had gotten "too big for their britches" with too many deals over the years.
