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Washington Mutual Collapses

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Washington Mutual Collapses

Economy

Washington Mutual Collapses

Washington Mutual Collapses

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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.

MELISSA BLOCK, Host:

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

JPMorgan Chase Buys Washington Mutual

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LINDA WERTHEIMER, host:

It's Morning Edition from NPR News. I'm Linda Wertheimer.

STEVE INSKEEP, host:

And I'm Steve Inskeep. Good morning. Americans wake up this morning to more dramatic news about the financial bailout. Stock markets are likely to open today without a plan in place. That big meeting between President Bush, the presidential candidates and congressional leaders blew up yesterday. Negotiations do continue today, and we'll have more on that story in a moment.

WERTHEIMER: We begin our coverage this morning with the failure of the nation's largest savings and loan. The government seized Washington Mutual, and much of the company will now be sold to JPMorgan Chase. NPR's Jim Zarroli joins me now. Jim, this is being called the largest bank failure in U.S. history. Can you remind us how the company got into so much trouble?

JIM ZARROLI: Well, the same that killed off Bear Stearns, that killed off Lehman Brothers, IndyMac, they are all hurt in the implosion of the mortgage market. Washington Mutual, in particular, did a lot of mortgage lending in California and Florida, which are - both states are states that have had a lot of foreclosures. The Office of Thrift Supervision, which regulates the banks, said Washington Mutual had lost than $6 billion in the last three quarters. Now, in the past week or so, something else had happened. We've seen this ramp-up in the - just the chaos in the financial markets, and customers have been pulling out about $16 billion worth of deposits, which is nine percent of Washington Mutual's deposits, as of June 30. So, the government figured now it had to step in. It had to act before things got much worst. So, it came in. It shut Washington Mutual down and arranged to sell it.

WERTHEIMER: So, in effect, preventing what looked like a - what was shaping up to be a run on this huge bank. Now, it's a retail bank, Jim. So, what happens to the customers and to the people who still have deposits there?

ZARROLI: The government says it's going to - it's reopening today as usual. It will just have new owners. There will be a seamless transition. The regulators are trying to do what they always do in situations like this. They want to convince people that, you know, things are normal, so there isn't a run on the bank. They don't want too many other - more people lining up to take their money out.