JPMorgan Chase buying Washington Mutual\'s assets for $1.9 billion ...

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As the debate over a $700 billion bank bailout rages on inWashington, one of the nation's largest banks _ Washington MutualInc. _ has collapsed under the weight of its enormous bad bets onthe mortgage market.
The Federal Deposit Insurance Corp. seized WaMu on Thursday, andthen sold the thrift's banking assets to JPMorgan Chase & Co.for $1.9 billion.
Seattle-based WaMu, which was founded in 1889, is the largest bankto fail by far in the country's history. Its $307 billion in assetseclipse the $40 billion of Continental Illinois National Bank,which failed in 1984, and the $32 billion of IndyMac, which thegovernment seized in July.
One positive is that the sale of WaMu's assets to JPMorgan Chaseprevents the thrift's collapse from depleting the FDIC's insurancefund. But that detail is likely to give only marginal solace toAmericans facing tighter lending and watching their stockportfolios plunge in the wake of the nation's most momentousfinancial crisis since the Great Depression.
Because of WaMu's souring mortgages and other risky debt, JPMorganplans to write down WaMu's loan portfolio by about $31 billion _ afigure that could change if the government goes through with itsbailout plan and JPMorgan decides to take advantage of it.
"We're in favor of what the government is doing, but we're notrelying on what the government is doing. We would've done itanyway," JPMorgan's Chief Executive Jamie Dimon said in aconference call Thursday night, referring to the acquisition. Dimonsaid he does not know if JPMorgan will take advantage of thebailout.
WaMu is JPMorgan Chase's second acquisition this year of a majorfinancial institution hobbled by losing bets on mortgages. InMarch, JPMorgan bought the investment bank Bear Stearns Cos. forabout $1.4 billion, plus another $900 million in stock ahead of thedeal to secure it.
JPMorgan Chase is now the second-largest bank in the United Statesafter Bank of America Corp., which recently bought Merrill Lynch ina flurry of events that included Lehman Brothers Holdings Inc.going bankrupt and American International Group Inc., the world'slargest insurer, getting taken over by the government.
JPMorgan also said Thursday it plans to sell $8 billion in commonstock to raise capital.
The downfall of WaMu has been widely anticipated for some timebecause of the company's heavy mortgage-related losses. Asinvestors grew nervous about the bank's health, its stock priceplummeted 95 percent from a 52-week high of $36.47 to its close of$1.69 Thursday. On Wednesday, it suffered a ratings downgrade byStandard & Poor's that put it in danger of collapse.
WaMu "was under severe liquidity pressure," FDIC Chairman SheilaBair told reporters in a conference call.
"For all depositors and other customers of Washington Mutual Bank,this is simply a combination of two banks," Bair said in astatement. "For bank customers, it will be a seamless transition.There will be no interruption in services and bank customers shouldexpect business as usual come Friday morning."
Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc.,HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canadawere also reportedly possible suitors. WaMu was believed to betalking to private equity firms as well.
The seizure by the government means shareholders' equity in WaMuwas wiped out. The deal leaves private equity investors includingthe firm TPG Capital, which led a $7 billion cash infusion in thebank this spring, on the sidelines empty handed.
WaMu ran into trouble after it got caught up in the once-boomingsubprime mortgage business. Troubles then spread to other parts ofWaMu's home loan portfolio, namely its "option" adjustable-ratemortgage loans. Option ARM loans offer very low introductorypayments and let borrowers defer some interest payments until lateryears. The bank stopped originating those loans in June.
Problems in WaMu's home loan business began to surface in 2006,when the bank reported that the division lost $48 million, comparedwith net income of about $1 billion in 2005.
At the start of 2007, following the release of the company's annualfinancial report, then-CEO Kerry Killinger said the bank hadprepared for a slowdown in its housing business by sharply reducingits subprime mortgage lending and servicing of loans. Alan H.Fishman, the former president and chief operating officer ofSovereign Bank and president and CEO of Independence CommunityBank, replaced Killinger earlier this month.
As more borrowers became delinquent on their mortgages, WaMu workedto help troubled customers refinance their loans as a way to avoiddefault and foreclosure, committing $2 billion to the effort lastApril. But that proved to be too little, too late.
At the same time, fears of growing credit problems kept investorsfrom purchasing debt backed by those loans, drying up a source ofcash flow for banks that made subprime loans.
In December, WaMu said it would shutter its subprime lendingbusiness and reduce expenses with layoffs and a dividend cut.
The bank in July reported a $3 billion second-quarter loss _ thebiggest in its history _ as it boosted its reserves to more than $8billion to cover losses on bad loans. Over the last three quarters,it added $10.9 billion to its loan-loss provisions.
JPMorgan Chase said it was not acquiring any senior unsecured debt,subordinated debt, and preferred stock of WaMu's banks, or anyassets or liabilities of the holding company, Washington MutualInc. JPMorgan also said it will not take on the lawsuits facing theholding company.
JPMorgan Chase said the acquisition will give it 5,400 branches in23 states, and that it plans to close less than 10 percent of thetwo companies' branches.
The WaMu acquisition would add 50 cents per share to JPMorgan'searnings in 2009, the bank said, adding that it expects to havepretax merger costs of approximately $1.5 billion while achievingpretax savings of approximately $1.5 billion by 2010.
"This is a definite win for JPMorgan," said Sebastian Hindman, ananalyst at SNL Financial, who said JPMorgan should be able toshoulder the $31 billion writedown to WaMu's portfolio.
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AP Business Writers Marcy Gordon in Washington and Sara Lepro inNew York contributed to this report.
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