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Largest Bank Failure in History

Published 09/26/08 Dustin Ensinger - Print Article
E-mail - editor@economyincisis.org

Late Thursday night, Washington Mutual was seized by Federal Regulators who then brokered a deal for the company to be sold to JPMorgan Chase for $1.9 billion. WaMu, the nation’s largest savings and loan, is the largest bank to fail in U.S. history with $307 billion in assets and $188 billion in deposits.

As part of the deal JPMorgan Chase will absorb $31 billion in losses- the toxic assets that led to WaMu’s demise. JPMorgan Chase also plans to shut down 10 percent of WaMu’s 5,400 branches around the country.

The failed bank’s shareholders and bond holders will likely be wiped out.

WaMu’s collapse - marking the thirteenth bank failure this year - is further evidence of the precarious state of the current financial markets. To bring calm and stability to the markets, President Bush is trying to push a $700 billion bailout package through Congress. However, as of last night no consensus could be reached on how that deal should be structured. Conservative House Republicans, reluctant to go along with such a large government intervention into the economy, presented their own proposal last night.

WaMu’s failure raises the question of why some institutions are allowed to fail while others are rescued. Both Lehman Brothers and WaMu were allowed to collapse, yet the government recently saved Goldman Sachs, Morgan Stanley and American International Group.

Federal Regulators claimed that unless a deal was brokered for the sale of WaMu, a complete takeover by the Federal Deposit Insurance Corp. could have depleted nearly all of the failed bank’s insurance funds.

WaMu, like many other financial institutions, took too many credit risks in the housing sector and with credit cards. The end appeared imminent on Monday as a run on the bank occurred, depleting 10 percent of all the bank’s deposits. Shares of the company fell 90 percent to 16 cents a share as trading opened Friday.

Source The New York Times:

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, the nation’s largest savings and loan, to JPMorgan Chase for $1.9 billion, averting another potentially huge taxpayer bill for the rescue of a failing institution.

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