Washington Mutual Collapses

The battered savings and loan company Washington Mutual has become the latest casualty of the subprime mortgage disaster. Regulators say the bank fell over the edge because in the past week or so more and more customers began pulling their deposits out.

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From NPR News, this All Things Considered. I'm Melissa Block. It's being called the biggest bank failure in U.S. history. Seattle-based savings and loan Washington Mutual had suffered big losses selling risky mortgages to home buyers. Last night it was seized by the government and most of its assets sold to JPMorgan Chase. Regulators say the bank failed in part because of a sudden rush by depositors to pull their money out over the past week or so. NPR's Jim Zarroli reports.

JIM ZARROLI: Regulators had long been keeping an anxious eye on Washington Mutual. The company, which is known as WaMu, had been steadily losing money for nearly a year, more than six billion years dollars in the last three quarters alone. Then, more than a week ago, WaMu began to experience a good old fashioned bank run. John Reich heads the Office of Thrift Supervision, which regulates savings and loans.

JOHN REICH: Beginning about the 15th of September and continuing everyday until through yesterday, the bank experienced a serious run on deposits totaling about $16.7 billion dollars over that nine-day period.

ZARROLI: What suddenly caused WaMu's customers to begin pulling so much money out of the bank isn't clear. But it undoubtedly had a lot to do with the constant stream of bad news from Wall Street and the slow decline of economic growth. Reich says most of WaMu's customers had nothing to worry about. The bank was insured by the Federal Deposit Insurance Corporation, which means deposits of less than $100,000 were protected. But Reich says not everyone understands that.

REICH: I think we have a new generation of bank customers who know little or nothing about deposit insurance and I think that we need to reeducate the public.

ZARROLI: Regulators worried that a failure of WaMu would be a huge disruption for the banking system. It's the country's biggest savings and loan. So they began looking for a company to buy it. They talked to Citigroup and Wachovia. Finally, last night, came the news that WaMu would be bought by the banking giant JPMorgan Chase. Here was Sheila Bair, head of the Federal Deposit Insurance Corporation talking on CNBC today.

SHEILA BAIR: This institution was the big issue for us and we wanted to make sure that we handled it in a way that was smooth, that did not impair depositor confidence or public confidence and obviously at very minimal or zero cost for us.

ZARROLI: The demise of WaMu is a story of stunning miscalculation by the company's management and a relentless thirst for profits. Karen Shaw Petrou of Federal Financial Analytics says WaMu used to be a pretty conservative institution but a couple of years ago, it changed its strategy.

KAREN SHAW PETROU: It decided to walk away from safe mortgages and instead to double down into higher risk ones. That proved a fatal mistake.

ZARROLI: Petrou says WaMu began offering no-documentation loans and loans that gave borrowers a lot of leeway about when they'd make payments. She says the company was drawn into the subprime business because of the huge profits that could be made. Unfortunately, it got in just as subprime was peaking. By this summer, WaMu was on the FDIC's list of troubled banks and regulators forced out its CEO and replaced him with someone else. For all its troubles, WaMu still has some valuable assets. It has a huge network of branches and a big customer base. Petrou says it can still make a lot of money selling credit cards and mortgages.

SHAW PETROU: That's what Washington Mutual used to do. It originated sound, conservative mortgages and I'm sure there are people left in the bank who knows how to do that. At least I hope so.

ZARROLI: JPMorgan Chase clearly thinks WaMu's assets are worth something. The company is paying just under two billion dollars for the bank, a very low amount. It is having to write down a lot of WaMu's debts. But JPMorgan officials say they think they can make the deal work even if the economy deteriorates further and the losses prove to be worse than expected. They're betting that they can make something out of the disaster that WaMu has become. Jim Zarroli, NPR News New York.

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JPMorgan Chase Buys Washington Mutual

Americans woke up Friday to more dramatic news about the financial bailout. As a big meeting between President Bush, the presidential candidates and congressional leaders ended Thursday without a consensus, news broke of the failure of the nation's largest savings and loan.

The government seized Washington Mutual, and much of the company is being sold for about $2 billion to JPMorgan Chase, which also bought Bear Stearns after its collapse in March. Like Bear Stearns, Lehman Brothers and IndyMac, Washington Mutual was caught in the implosion of the mortgage market, NPR's Jim Zarroli tells Linda Wertheimer. It's being called the biggest bank failure in U.S. history.

"Washington Mutual in particular did a lot of mortgage lending in California and Florida — which are both states that have had a lot of foreclosures. The Office of Thrift Supervision, which regulates the banks, said Washington Mutual had lost more than $6 billion in the last three quarters," he says.

After the recent ramp-up in the chaos in the financial markets, customers pulled out about $16 billion worth of deposits, which were 9 percent of Washington Mutual's deposits as of June 30.

"The government figured it had to step in, it had to act before things got much worse, so it came in, it shut Washington Mutual down and arranged to sell it," Zarroli says.

Trying to keep more people from taking their money out, regulators are saying it will be a seamless transition — and that the bank is reopening Friday as usual, just with new owners.

The move spares taxpayers another costly bailout, as the Federal Deposit Insurance Corp. would have had to come in with a big federal rescue for the depositors.

"It's an FDIC-insured bank, so the FDIC would have had to pay for accounts up to $100,000," Zarroli says. "The thing is, the FDIC that is supposed to pay customers is running low — there have just been a lot of bank failures this year — so the fact that JPMorgan Chase has stepped in means there's a company with deep pockets getting involved."

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