Regulators averted another potential huge taxpayer bill by holding an emergency sale of virtually all of Washington Mutual to JP Morgan Chase for $1.9 billion.
JPMorgan Chase had acquired the failed Bear Stearns only six months ago and with the inclusion of Washington Mutual will become the largest nationwide retail franchise after Bank of America.
"We are building a company," James Dimon, chairman and chief executive of JPMorgan Chase, told the New York Times. "We are kind of lucky to have this opportunity to do this. We always had our eye on it."
Washington Mutual, founded in 1889, was one of the nation's largest savings and loans, but had in recent months become an example of the excesses in the mortgage boom. Its $307 billion in assets far exceed that of the Continental Illinois National Bank, which failed in 1984 with $40 billion, and the $32 billion of IndyMac, which the government seized this July.
The deal to sell WaMu to JPMorgan Chase effective protects its customers, mostly based in Seattle, although WaMu shareholders and bondholders will most likely lose everything. Washington Mutual's account holders, as are all checking and savings customers, are insured through the Federal Deposit Insurance Corporation for up to $100,000 per account.
FDIC Chairman Sheila Bair released a statement in an attempt to comfort Washington Mutual customers.
"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks. For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."
JPMorgan, by taking over Washington Mutual's toxic mortgages and credit card loans, will save the FDIC around $31 billion in losses that would have been its responsibility and would have depleted its insurance fund. But in a time where Americans are seeing one insurance bank or another fail, the fact that Washington Mutual was mostly saved from going under is not likely to give solace to a nervous public.
WaMu "was under severe liquidity pressure," Bair told reporters in a conference call. "This institution was a big question mark about the health of the deposit fund. It was unique in its size and exposure to higher risk mortgages and the distressed housing market. This is the big one that everybody was worried about."
Problems at Washington Mutual's home loan business came to light in 2006, when the bank reported a loss of $48 million. Towards the beginning of 2007, then-CEO Kerry Killinger said that the company would be slowing down its housing business and decreasing the number of subprime mortgage lending and servicing of loans. As more and more borrowers became delinquent on their mortgages, Washington Mutual tried to refinance loans that would prevent default or foreclosure. As evidenced by their takeover, that move came too late.
For the U.S. economy as a whole, new data emerged Friday showing that the U.S. economic growth was not as strong as previously thought. Consumers did not spend as vigorously and businesses were trimming their investments, a sure sign that confidence was not high even before the financial markets became to run into trouble. The Commerce Department reported that the gross domestic product, or GDP, increased at a 2.8 percent annual rate in the April to June period. While that fell short of the 3.3 percent growth that was estimated, it was still better than the two previous quarters.
As pressure mounted on Capitol Hill to approve a bailout plan to help Wall Street, President Bush briefly addressed the nation Friday morning saying that while there were still disagreements on the bailout plan, immediate action was needed. He is trying to bring rebellious members of his own party behind the plan, the Associated Press reported.
Mr. Bush delivered a terse statement from outside the Oval Office of the White House, acknowledging that lawmakers have a right to express their doubts and work through disagreements, but declaring they must "rise to the occasion" and approve a plan to avert an economic meltdown.
"There are disagreements over aspects of the rescue plan," he told reporters, "but there is no disagreement that something substantial must be done. We are going to get a package passed."
Wall Street is watching the actions on the Hill closely.
"The negotiations over the bailout are sapping the enthusiasm that people could have for the market," Rick Metler, president of investment firm LibertyView Capital Management in New York told the AP. "I think with no agreement, it's going to be hard for the market to push ahead."