Washington Mutual, the giant lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators on Thursday night in what is by far the largest bank failure in American history.
Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual to J.P. Morgan Chase. The remainder of WaMu, the nation’s largest savings and loan, will be operated by the government. Shareholders and some bondholders will be wiped out. WaMu depositors are guaranteed by the Federal Deposit Insurance Corp. up to the $100,000 per account limit. WaMu customers are unlikely to be affected.
J.P. Morgan Chase is to take control Friday of all of WaMu’s 2,300 branches, which stretch from New York to California, and will oversee its big portfolio of mortgage and credit card loans. It will also acquire all of WaMu’s deposits with the sale.
For weeks, the Federal Reserve and the Treasury Department had been nervous about the fate of WaMu, among the worst-hit by the housing crisis, and pressed hard for the bank to sell itself. As panic gripped financial markets last week following the collapse of Lehman Brothers, the government stepped up its efforts, working behind the scenes, and at points going behind WaMu’s back to work privately with potential bidders on a deal.
The seizure and the deal with J.P. Morgan came as a shock to Washington Mutual’s board, which was kept in the dark: the company’s newly-minted chief executive, Alan C. Fishman, was in flying from New York to Seattle at the time the deal was finally brokered, according to these people.
The action removes one of America’s most troubled banks from the financial landscape, and helps to avoid sticking taxpayers with a huge bill for the rescue of another failing institution.
As with Lehman Bros., the government allowed Washington Mutual to fail because it was less entangled with the rest of the financial system than a behemoth like American International Group Inc., which the government spent $85 billion to take over last week while it faced collapse.