The collapse of Washington Mutual Bank on September 25, 2008 is officially listed as the largest banking failure in history by the FDIC.
The collapse of Washington Mutual occurred after nervous depositors withdrew $16.7 billion in the ten days prior to the bank’s collapse. Fearing a classic run on the bank situation and perhaps a nationwide financial panic, regulators quickly closed Washington Mutual and sold it to JPMorgan Chase.
In a terse press release regarding the seizure of Washington Mutual, the FDIC stated that “this is simply a combination of two banks”, with JPMorgan acquiring the banking operations of Washington Mutual Bank. At the time of closing, Washington Mutual had $307 billion in assets and $188 billion of deposits.
Considering Washington Mutual’s size and the huge losses on its loan portfolio, one might have expected that the financial pain of its collapse would have been widespread and prolonged. This has not turned out to the case. Two years after Washington Mutual’s collapse, it has become apparent that there were more winners than losers in the largest banking failure in history.
Topping the list of winners is the FDIC which, acting as receiver for Washington Mutual, received $1.9 billion from JPMorgan Chase and incurred no losses to the Deposit Insurance Fund. According to the FDIC, “WaMu’s balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses”.
Depositors did not lose a nickel, including those with balances over the FDIC Deposit Insurance limits, since JPMorgan assumed all deposits.
Washington Mutual’s highly paid top executives faced no retribution for running the bank into insolvency. The last Chief Executive of Washington Mutual did particularly well. Alan Fishman, brought on board two weeks before Washington Mutual’s collapse to replace ousted CEO Kerry Killinger, was given a sign-on bonus of $7.45 million in cash, a $1 million salary, an annual bonus of $3.65 million and $8 million a year in stock grants.
JPMorgan acquired a strong deposit base and a vast network of 2, 239 branches that allowed it to establish its presence in important markets such as Florida and California. Although JPMorgan took a writedown of approximately $31 billion when it acquired Washington Mutual from the FDIC, the consensus is that JPMorgan acquired Washington Mutual at a bargain price.
In early 2008, Washington Mutual had rejected an offer of $8 per share from JPMorgan Chase and sought instead to raise private equity capital rather than sell itself. This decision ultimately lead to Washington Mutual’s collapse and subsequent large losses by shareholders and unsecured creditors. JPMorgan’s purchase agreement with the FDIC for Washington Mutual included acquiring the liabilities from covered bonds and other secured debt while specifically excluding claims by equity, subordinated and senior unsecured debt holders.
Unsecured creditors in the Washington Mutual collapse had to pursue their claims with Washington Mutual, Inc, the holding company for Washington Mutual Bank, which filed for bankruptcy the day after the FDIC seized Washington Mutual Bank. The bankruptcy of Washington Mutual, Inc. is now nearing its conclusion and the biggest losers in the Washington Mutual fiasco are probably those least able to afford the loss – individual common stockholders, many of whom lost a lifetimes worth of savings.
A bankruptcy court appointed examiner recently advised equity holders that there was no hope of ever recovering their losses and that further efforts to collect would be futile. Washington Mutual, Inc, the holding company for Washington Mutual Bank originally traded on the New York Stock Exchange under the symbol WM. Since its bankruptcy, Washington Mutual still trades, now on the “pink sheets”, under the symbol WAMUQ.PK at 4 cents per share. Based on the amount of shares outstanding and the $45 per share price in 2007, common shareholders lost approximately $41 billion.
Below are the graphs depicting the financial wipeout by common stock shareholders.
Here is the trading history after Washington Mutual’s bankruptcy under the trading symbol WAMUQ.PK.
Shareholders may take some solace in the fact that some of the smartest and biggest private investors thought that Washington Mutual would recover prior to its collapse. In April 2008, TPG, a private equity firm and a group of institutional investors invested $7 billion dollars in Washington Mutual, in return for 176 million Washington Mutual common shares. The entire $7 billion dollar investment was lost.
Ironically, Washington Mutual, Inc. (WAMUQ.PK) will still have value once it settles claims with secured creditors and emerges from bankruptcy, due to a valuable $20 billion dollar net operating loss (NOL) carryforward which can be credited against future earnings. WAMUQ.PK could merge with another entity to take advantage of the NOL or another bank could buy WAMUQ.PK to save billions of dollars in taxes by offsetting the NOL against profits.