JP Morgan Chase buys WaMu out

JP Morgan Chase has taken over the deposit taking subsidiary of Washington Mutual. The transaction is effective immediately, meaning it has closed. This is the biggest deal in FDIC activity yet.

Note: I originally heard this story just before 9PM ET and Yves Smith at naked capitalism has her take on the news.

Obviously, this is a bankruptcy as much as a takeover by JP Morgan. Will it be seen as such by the Credit Default Swaps market? JP Morgan Chase is only buying the deposit-taking subsidiary. I imagine the Credit Default Swap exposure is for the holding company, which is now effectively bankrupt. This is a very important point because my understanding is that all litigation – including class-action lawsuits – should rest with the Washington Mutual holding company were the common shares and subordinated preference shares sit. The only residual litigation risk that JP Morgan is taking on comes from individual lawsuits that mortgage customers might file.

I learned from the JP Morgan Conference Call at 9:15 PM ET that Washington Mutual went into a competitive bidding forced sale at the behest of the FDIC because they were on the verge of collapse. Remember they had an agreement with the Office of Thrift Supervision for close scrutiny.

I had asked last month what the FDIC would do if WaMu went bankrupt in my post, "What if a large U.S. regional bank goes to the wall?". Now we know. They will not assume the huge losses here. This is the best case scenario because the FDIC does not have to fund the $31 billion in writedowns that this deal has created. Nor could they (see post) as JPM was forced to write down $31 billion of WaMu’s assets (I assume because of FAS 157).

This deal leaves us with three enormous banks dominating the U.S. banking landscape in JP Morgan Chase, Bank of America, and Citigroup. This is a much better deal than the BAC – Merrill deal. Jamie Dimon is obviously a much better deal maker than Ken Lewis. Let’s see how the market responds tomorrow.

Synopsis of JP Morgan conference call

• The deal is immediately accretive and the accretion will grow over time.
• JPM has not built in lots of revenue growth or synergies.
• JPM is offering $8 billion of common stock to maintain balance sheet and capital ratios at reasonable levels.
• This is the most important part: they are buying the bank, not the holding company. That means they are not buying unsecured preferred debt (ouch).
• Their competitive bid was for $1.9 billion, an incredibly low sum for hundreds of billions in assets and is reflective of the massive writedowns they have to take.
• The transaction closes immediately. They already own the business. That’s how deals function in crisis!
• JPM says the love the branch business. It helps consumer business and small business as well as private clients. (Of course they love the deposit-taking business, it means they are less vulnerable to the inter-bank market.)
• After the deal JPM will have 5400 branches and $900 billion in deposits, increasing number of deposits from retail.
• They pick up the entire West Coast and get 250 branches in Florida. They believe this makes the deal a "unique opportunity."
• The deal also makes JPM even stronger in their home markets, as Washington Mutual expanded into the Tri-State area with its 2001 acquisition of Dime Bancorp.
• This deal has been in the works for a while because they have a detailed presentation which I have linked to at the bottom of this post.
• Mortgages: $1.4 trillion in combined mortgages – that’s huge.
• There are not huge synergies assumed into the deal to make the numbers here. JPM will close less than 10% of their combined branches and look to relocate displaced workers.
• They will exit all non-branch based retail lending.
• They will rebrand branches, so the Washington Mutual name is history.
• They are marking down assets on WaMu’s loan portfolios by $31 BILLION. That’s huge. (See page 17 of the presentation below). Again, JPM is taking a huge $31 BLLION writedown on assuming WaMu’s liabilities. WOW!
• They have really been doing their due diligence and have poured over WaMus docs.
• They are also making some pretty dire assumptions in this deal regarding downside in house prices and unemployment. (see page 16).
• Tier 1 capital ratio goes down from 9.2 to 8.3%. That’s why they are raising capital.
• These guys are good. JP Morgan is cleaning up here. These numbers sound great.

Conference Call Q&A

• Slides 18 and 19’s pro forma numbers include the $8 billion share sale.
• Litigation exposure: JPM is NOT taking over the holding company so any liability related to the assets themselves moves to JPM. But the other liabilities remain with the holding company, which is effectively bankrupt.

The FDIC press release

JPMorgan Chase acquired the banking operations of Washington Mutual Bank in a transaction facilitated by the Federal Deposit Insurance Corporation. All depositors are fully protected and there will be no cost to the Deposit Insurance Fund.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," said FDIC Chairman Sheila C. Bair. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior debt holders were not acquired.

"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," Bair said.

Washington Mutual Bank also has a subsidiary, Washington Mutual FSB, Park City, Utah. They have combined assets of $307 billion and total deposits of $188 billion.

Thursday evening, Washington Mutual was closed by the Office of Thrift Supervision and the FDIC named receiver. WaMu customers with questions should call their normal banking representative, service center, 1-800-788-7000 or visit www.WaMU.com. The FDIC’s consumer hotline is 1-877-ASK-FDIC (1-877-275-3342) or visit www.fdic.gov.

JP Morgan press release

JPMORGAN CHASE ACQUIRES THE DEPOSITS, ASSETS AND CERTAIN LIABILITIES OF WASHINGTON MUTUAL’S BANKING OPERATIONS

Highly attractive, strategic transaction significantly strengthens consumer franchise. Deal expected to be accretive to earnings immediately. Adds large, stable deposit base and recurring earnings stream to company.

Company intends to raise additional capital in conjunction with this transaction to maintain strong capital position.

• Acquisition creates largest U.S. depository institution, with over $900 billion of customer deposits
• Expansion into attractive California, Florida and Washington State markets creates nation’s second-largest branch network; also strengthens existing presence in New York, Texas, Illinois, Arizona, New Jersey, Colorado, Connecticut and Utah
• Larger branch footprint will allow company to further extend and grow commercial banking, business banking, credit card, consumer lending and wealth management efforts

Sources

• JP Morgan Press Release
• JP Morgan Conference Call Presentation
• Office of Thrift Supervision fact sheet