THE BANK THAT WAS SOLD FOR ALMOST NOTHING DURING THE FINANCIAL CRISIS
It had more than $300 billion in assets, thousands of branches and millions of customers. Then, in the middle of the financial crisis, its banking operations were sold to JPMorgan Chase for $1.9 billion.
On September 25, 2008, something extraordinary happened in American banking.
Washington Mutual collapsed.
Not a small local bank.
Not a niche lender.
WaMu had:
$307 billion in assets
$188 billion in deposits
More than 2,300 branches
across 15 states.
It was the largest failure of an insured depository institution in FDIC history.
And JPMorgan Chase bought its banking operations for just:
$1.9 billion.
HOW DOES A $307 BILLION BANK GET SOLD FOR $1.9 BILLION?
The answer is that $307 billion in assets isn't the same thing as $307 billion in value.
A bank's assets include loans and other financial assets.
If many of those loans are suddenly worth less because borrowers can't repay them, the headline asset number can become misleading.
And that's exactly what was happening to WaMu.
The U.S. housing market had deteriorated.
Mortgage losses were increasing.
Investors were losing confidence.
Depositors were withdrawing money.
The bank's financial position was deteriorating rapidly.
WAΜU HAD A HUGE MORTGAGE BUSINESS
During the housing boom, Washington Mutual had expanded aggressively.
It became one of America's largest mortgage lenders.
But the same strategy that helped make the bank enormous became a problem when the housing market turned.
The FDIC later described WaMu as having pursued a high-risk lending strategy, with weak underwriting standards and inadequate risk controls.
The problem wasn't simply that the bank owned houses.
It had made enormous amounts of loans connected to a housing market that was deteriorating.
When borrowers started defaulting, those loans became much less valuable.
THEN THE LOSSES STARTED SHOWING UP
Between the third quarter of 2007 and the third quarter of 2008, WaMu recorded approximately:
$5.9 billion
in cumulative net charge-offs and asset write-offs.
Its tangible common equity ratio also deteriorated significantly.
And after Lehman Brothers collapsed in September 2008, deposit outflows became much more serious.
The bank was running out of something even more important than profits:
confidence.
THEN CUSTOMERS STARTED TAKING THEIR MONEY OUT
This is where banking becomes different from an ordinary business.
A restaurant can survive if customers stop coming for a week.
A bank can't easily survive a massive loss of confidence.
Banks don't keep every customer's money sitting in a vault.
They use deposits as part of their funding structure and hold assets such as loans and securities.
So when huge numbers of customers want their money at the same time, liquidity becomes critical.
For WaMu, deposit withdrawals accelerated after other major financial institutions failed and rumors about its condition spread.
SEPTEMBER 25, 2008
The Office of Thrift Supervision closed Washington Mutual Bank.
The FDIC became receiver.
And almost immediately, JPMorgan Chase acquired the banking operations.
There was no long public auction.
No months of negotiations with customers watching.
The transaction was structured so that customers could continue banking with essentially no interruption.
JPMorgan Chase acquired the assets and assumed most of the liabilities.
The price:
$1.9 billion.
BUT JPMORGAN WASN'T BUYING A $307 BILLION CHECK
This is the part that makes the headline misleading.
JPMorgan wasn't simply handing over $1.9 billion and receiving $307 billion of risk-free assets.
It was acquiring a failed bank's banking operations and a huge portfolio of assets and liabilities whose economic value had been damaged by the crisis.
And JPMorgan later discovered that the situation was even worse than some of WaMu's reported numbers suggested.
According to an FDIC analysis, JPMorgan wrote off another approximately:
$29 billion
of WaMu assets after the acquisition.
That brought total write-offs to nearly:
$35 billion.
THE CUSTOMERS DIDN'T JUST DISAPPEAR
One reason the transaction was so important was that JPMorgan didn't simply buy a collection of bad loans.
It acquired a huge banking franchise.
That meant:
Customers
↓
Deposits
↓
Branches
↓
Loans
↓
Banking relationships
↓
A massive geographic footprint
The FDIC said all depositors were fully protected and the transaction was completed at no cost to the FDIC's Deposit Insurance Fund.
For ordinary WaMu customers, the experience was deliberately designed to feel almost normal.
Their accounts moved to Chase.
Branches continued operating.
Direct deposits continued.
Customers could continue using their banking services.
WHAT HAPPENED TO WAΜU'S SHAREHOLDERS?
This is where the story becomes much harsher.
The banking operations were transferred to JPMorgan.
But Washington Mutual, Inc., the holding company that owned the bank, was a different legal entity.
The holding company filed for bankruptcy protection the next day.
The FDIC states that equity, subordinated debt and senior unsecured debt holders were not acquired as part of the bank transaction.
So:
Customers were protected.
The bank's operations continued.
The shareholders were not simply carried over into Chase.
That distinction is crucial.
THE TIMING WAS INSANE
WaMu failed on:
September 25, 2008.
Just days after:
Lehman Brothers collapsed
and while the entire financial system was under enormous pressure.
The FDIC's 2008 timeline places WaMu's failure directly in the middle of the sequence of events that shook global financial markets.
The crisis was moving so quickly that regulators had to resolve enormous financial institutions in days rather than months.
WHY JPMORGAN WANTED IT
The deal gave JPMorgan something valuable even though WaMu was failing:
scale.
JPMorgan acquired a huge deposit base, a large loan portfolio and thousands of branches.
It was effectively buying a massive banking network at a crisis-era price while the FDIC handled the resolution.
The deal also strengthened JPMorgan's position in consumer banking.
THE STRANGE CONTRADICTION
Look at the numbers:
$307 billion
WaMu's assets at failure.
↓
$188 billion
Deposits.
↓
2,300+
Branches.
↓
$1.9 billion
Payment made by JPMorgan Chase.
Those numbers don't mean JPMorgan bought $307 billion of guaranteed wealth for $1.9 billion.
They show something much more interesting:
When a financial institution is failing, the headline size of the institution can become almost irrelevant to what someone is willing to pay for it.
Risk changes the price.
THE BIGGEST LESSON
A bank can become enormous while simultaneously becoming fragile.
WaMu had grown into one of America's largest financial institutions.
But size didn't protect it.
When mortgage losses increased, confidence disappeared and deposits started leaving, the value of the institution changed extremely quickly.
The FDIC later recorded WaMu as the largest bank failure in its history by assets, yet its resolution was completed without a loss to the Deposit Insurance Fund.
MAACAT PERSPECTIVE
The most interesting number isn't actually $1.9 billion.
It's the gap between:
$307 billion in assets
and
$1.9 billion paid for the banking operations.
That gap shows something fundamental about finance:
An asset can be enormous on a balance sheet and still be worth far less when the risks behind it become real.
WaMu wasn't destroyed because it suddenly became a small bank.
It collapsed while it was still enormous.
Size can make a business powerful.
But size can also make the consequences of bad risk management enormous.
