The Speaker is Charlie Scharf, Chief Executive
Officer of Retail Financial Services, speaking at a JPMorgan Shareholders
Meeting, about the WaMu Seizure.
It's about 2 minutes long.
"Great brands take a long time to build"
- Like the WaMu Brand for instance???
your Shares: WaMu
Adversary against JPM/FDIC: 09-50934
6-3-2009: WMI files Counter Claims against JPM for Billions of dollars:
What follows is a detailed
timeline of the events surrounding the seizure of Washington Mutual Bank.
We have a condensed version here: The
Calendar of Important
5-20-2009: WMI moves
to investigate JP Morgan!! Seeks $Billions in damages.
Phrases like 'far below market value', 'premeditated plan', 'designed
to damage', 'purchase...on the cheap', 'wrongful conduct',
'sham negotiations', 'misusing confidential information', 'violation of
confidentiality agreement', 'unfair advantage', and 'fire sale prices'
are in the court motion: CNBC
WMI is also suing JPMorgan for return of
their $4Billion deposit.
Washington Mutual Inc has filed suit against
the FDIC, and seeks damages of approx $40 Billion: WMI
vs FDIC Filed Document.
Behind the scenes. The havoc wreaked by some
very powerful men: The
Latest Monthly Operating Report:: April
2009 Operating Report
From the book 'House Of Cards: A Tale Of Hubris And Wretched Excess On
Wall Street' by Cohan, William D.
This book includes proof that Chase/JP Morgan acted in concert with the
US Treasury and the Fed to acquire Bear Stearns for a pittance which then
set the stage for a repeat-performance when Chase/JP Morgan was allowed
to buy Washington Mutual banks at a fire sale price.
Here is a small peek into the inner workings that brought WaMu down:
A final decision had just been made by the US Treasury, i.e., Hank Paulson,
in tandem with the Fed and major firms on Wall Street, that there would
be no bailout of Lehman Brothers and that Lehman Brothers would be forced
After Thain, Paulson and Geithner had left the New York Fed Sunday morning,
the following exchange ensued, according to several sources that were
there. John Mack, the CEO of Morgan Stanley, spoke up. 'Maybe we should
let Merrill [Lynch] go down, too. he said.
Aghast, JPMorgan Chase's [Jamie] Dimon pointed out how shortsighted that
was of Mack because Morgan Stanley might be the next firm that counterparties
lost faith in. 'John, if we do that, how many hours do you think it would
be before Fidelity would call you up and tell you it was no longer willing
to roll your paper?'
Dimon's comment quieted Mack. 'We thought Mack said that because he might
be buying Merrill,' someone who heard Mack's statement said, and wanted
to buy the firm on the cheap. (Mack denied he made the comment through
a spokesman. A spokesman for Dimon said Dimon did not remember having
the conversation with Mack.)
The Wamu Story
Washington Mutual Bank, or WaMu, as it was known
by its customers and employees, was seized on Thursday, September 25,
2008. The OTS intended to seize them on Friday, but the schedule was moved
up one day when a media leak threatened to expose the seizure.
This is the story of what happened, and when,
as well as some factors that affected the demise and sale of the bank.
It should be noted that Washington Mutual Bank (WMB) was the largest thrift
in the United States, and one of its largest banks. The seizure and sale
were conducted in secret while Washington Mutual Bank was still well capitalized,
liquid, while TARP was pending, and in fact at the same time WaMu was
seeking bids to sell itself.
Washington Mutual Bank (WMB) was a subsidiary of Washington
Mutual Inc. (WMI) Washington Mutual
Inc had many other subsidiaries before the seizure and sale by the OTS
and the FDIC. They had many less
subsidiaries after that transaction-- some that may have not been associated
with or subsidiaries of the bank (WMB).
Subsidiaries Post Seizure
Washington Mutual had $307B in
assets, $188B in deposits, 2239 branches, 4,932 owned and branded ATMs,
and 43,198 employees at the time of seizure.
They had multiple subsidiaries that were sold as well. The FDIC brokered the “sale” for $1.888 Billion.
Washington Mutual began after the “Seattle Fire” of 1889 was seized
on its 119th Birthday.
FDIC decided that $1.888 Billion was a just and fair price for the bank. It is interesting to note that the auction
offer presented by the FDIC permitted banks to bid $0.0
for the bank, and also totally disregarded the stockholders and bondholders,
as well as other liabilities of the bank.
The FDIC required only the administrative costs for the transaction,
and held the bank for only a few hours before ownership was transferred
to JPMorgan. Washington
Mutual Bank was forced to file Chapter 11 the following day. They lost $26 Billion in stock of WAMU (WMB)
due to the bank seizure.
The recent declines in the stock market are
well known, but few people realize that WaMu may have been the straw that
broke the camel's back. This seizure impacted not just Washington Mutual
Inc investors, but all types of investments in all US stock markets. Shock
waves have cascaded throughout stock markets worldwide. This leads one
to question whether Washington Mutual Bank should have been seized that
September evening. The sale of WAMU, for a fraction of its worth, was
conducted without regard for the bondholders or shareholders of the bank,
much less for the effects to the confidence in our stock markets and our
government in general.
Should WaMu have been seized, that fateful day?
Did the regulatory bodies
overseeing WaMu do their jobs properly?
You be the judge.
IN April, 2008, JPM
tried to buy Washington Mutual. They
had long coveted the thrift for its many branches in markets where they
had none and wanted to expand. The
price of expanding by themselves, without buying Washington Mutual, was
cost-prohibitive. Washington Mutual considered the $8 per share offer
from JPMorgan too little for the expansive bank with $307B in assets, $188B in deposits,
2239 branches, 4,932 owned and branded ATMs, and 43,198 employees.
JPMorgans offer was
rebuffed and Washington Mutual chose to enter a contract with TPG and
several investors instead, for a $7 Billion Capital injection. David Bonderman
heads TPG, a company known for its talent in identifying and maximizing
investment opportunities. Bonderman
had been on the Washington Mutual Board of Directors previously and rejoined
the board as part of their agreement.
“Two months before Washington Mutual
failed, Treasury Secretary Henry Paulson warned then-CEO Kerry Killinger
that he ought to sell the Seattle-based thrift before it deteriorated
further. ‘Paulson said, 'You should
have sold to JPMorgan Chase in the spring, and you should do so now. Things
could get a lot more difficult for you,' said one of several current and
former high-ranking WaMu executives familiar with details of the call.”
Enhances Investor Protections Against Naked Short Selling
makes it sound like they were doing their job doesn’t it? Unfortunately it was well known by hedge funds and other “shorters”
that the naked short selling ban was not enforced.
short selling of Washington Mutual continued to damage Washington Mutual
severely and although it is illegal, the SEC did nothing to stop it.
WaMu was not put on the list of banks that were not to be shorted. WaMu
CEO Killinger specifically asked for WaMu to be added to the list but
was refused. The Short ban notice announcement
on 15 July by the SEC was to be effective the 21st. On July 17, Killinger, the CEO, sent a FAX
transmittal, requesting to be added to the “no short” list and was refused.
It is interesting to note the fax, which was received on the 17th
was logged in as received 8:40pm on the 22nd by the "Chairman's Correspondence
The American Bankers Association, representing the interest of 8,500 banks,
said in a letter to the SEC that it fears short sellers will now concentrate
their efforts on banks that are not covered by the emergency order. They
asked that the order be expanded to include stocks of all banks and bank
holding companies. This request
was also ignored.
Evidence of Damage Caused by Naked Short Selling: WAMU Stock
Price vs. Failure to Deliver (FTD) of Securities
September 29, 2008
magazine cites that the OTS did not want to seize the bank but the FDIC
pressured them into it.
It has been widely discussed that the FDIC was under funded to cover the
amount of deposits they had to insure, and that the FDIC and OTS had differing
opinions about whether WAMU should be seized. The FDIC feared depletion
of its reserves and they expected other bank failures. Congress had not
increased its ability to raise premiums for many years, and indeed no
bank premiums were collected from 1996 to 2006, as the FDIC was at its
maximum threshold as required by law. They have since increased their
It is interesting to note however, the FDIC did have the ability to borrow
$30 Billion from the Treasury at the time. It is not clear why they did
not use their discretionary power to support the one of the largest banks
in the country, at least on a temporary basis. The bank had access to
$54 Billion of liquidity at that time--$4 Billion was on deposit at Washington
Mutual Bank and another $50 Billion was available, assumedly from the
secondary window at the Federal Reserve in San Francisco.
While all of this was happening the Economic Stabilization Act was being
discussed in Congress. While there was no question that TARP, as it has
come to be known, would eventually pass, there were arguments over many
details to be worked out. The bailout would have alleviated the banks
difficulties, at least in the short term, until a proper sale could be
arranged, rather than a "fire sale" which ultimately gave the
bank away for far less than fair value. The fact that the bailout was
pending meant banks were hesitant to bid due to the uncertainty; this
has been well documented in multiple news articles.
NOTE: There is no record of any document wherein WaMu
was required to raise additional capital, or improve its liquidity.
On 09/25/08 the OTS released a press release and recording
about the seizure of Washington Mutual...it notes they were well-capitalized
at the time of the seizure.
OTS Enforcement Actions noted on this report.
-- October 17, 2007 – Issued a Cease and Desist Order related to deficiencies
Secrecy Act/Anti-Money Laundering (BSA/AML) programs
-- October 17, 2007 – Assessed Civil Money Penalties (CMPs) related to
flood insurance regulations
-- November 14, 2007 – Initiated a formal examination of the appraisal
assess the validity of a complaint filed by the New York Attorney General’s
-- February 27, 2008 – Issued overall composite ratings downgrade and
Board resolution in response to the supervisory action
-- June 30, 2008 – Initiated discussions about Memorandums of Understanding
WMI and WMB (Washington Mutual Bank)
-- September 7, 2008 - Issued Memorandums of Understanding to WMI and
-- September 18, 2008 – Issued overall composite ratings downgrade
OTS Press release
Discusses the bank seizure.
Sept 8, 2008. WaMu said that it has entered into a memorandum of understanding
with the Office of Thrift Supervision concerning aspects of its operations.
WaMu committed to provide the OTS with an updated, multi-year business
plan and forecast for its earnings, asset quality, and capital and business
segment performance. The plan did not require the company to raise capital
or increase liquidity, WaMu said. (This plan was approved by the OTS)
09/11/08: WaMu provides an Update on Expectations for Third Quarter Performance
and notes the company continues to maintain a strong liquidity position
with approximately $50 billion of liquidity from reliable funding sources.
“The company's tier 1 leverage and total risk-based capital ratios at
June 30, 2008 were 7.76%, and 13.93%, respectively, which were significantly
above the regulatory requirements for well capitalized institutions. The
company expects both ratios to remain significantly above the levels for
well-capitalized institutions at the end of the third quarter.”
12/31/08: OTS press release regarding TARP after they saw
what mayhem the seizure of Washington Mutual caused.
is interesting to note that the West Coast Regional Director, Darrel Dochow,
was transferred after it was discovered there were irregularities in bookkeeping
methods, which were approved by Dochow, in the Indy Mac failure.
It has been also revealed that he permitted bookkeeping irregularities
with 4 other banks in his region. The
other banks have not been named. Dochow
had also been implicated in oversight failures in the Savings and Loan
crisis in the 1980’s and 1990’s. Dochow
was demoted after that, but was later promoted again to West Coast Regional
Director. He was transferred after the Indy Mac irregularities
were made public and he later retired.
Actions that adversely affected the sale and auction of Washington Mutual
09/23/08: FDIC auction "offer" -- essentially says that the
bidders can have the bank for nothing as long as they pay the administrative
costs of the transaction. (which are left blank)
It also says they can have any assets, whether they are on the
banks books or not (this info is on page one).
Sheila Bair said that the Washington Mutual seizure was done at no cost
to the taxpayers, but what were the administrative costs? That part of
the agreement was left blank. The shareholders and bondholders who lost
as much as $30 Billion were not considered, nor were the corporations,
Pension plans, or other institutions who owned (at that time) approximately
68% of Washington Mutual Common Stock.
(E-trade). Retirements for many people were wiped out
either directly by the loss of value in Washington Mutual Stock, or indirectly
through the loss in their Pension plans, 401K’s and the general market
panic that ensued. There is also a human cost; JPM has announced layoffs
of 9200 WaMu employees with plans to cut an additional 2800 by attrition. It has recently been noted in the news that
JPMorgan has made plans to outsource many jobs in their organization.
All the following documents regarding the FDIC auction are posted at http://wmish.com/docs/ and were
supplied by the FDIC via FOIA (Freedom of Information Act)
sends out “official” bid notice. Date of fax –Sept 24, 2008.
“5. Definitive Documents. Each Potential Acquirer's bid(s) should be based
upon the relevant transactions described in the Legal Documents and these
Instructions. Each should note that the transactions are merely summarized
herein and the Legal Documents are much more detailed. The Legal Documents
will govern the transaction regardless of the contents of these Instructions
and any other written or oral material or communication.”
JPMorgan bid for WAMU…NOTE: The details of the bid are
Washington Mutual Bank Closing book Sept 25, 2008: Date of seizure.
“The bid for alternatives 1, 2, or 3 must be at least the FDIC's administrative
costs of the closing equal to $_________________ (amount to be provided).
Assets Purchased: The Assuming Bank will purchase all assets whether or
not on the books of the Bank, except for those that are specifically excluded
under Article III of the Whole Bank agreement. In general, all assets
are acquired at book value with the exception of securities which are
purchased at fair market value.”
Of note, there was another bid for the bank. The FDIC will not release
any information on that bid. Another FOIA request confirmed the bidder
as Citigroup, but their bid was deemed "nonconforming" and the
information was so heavily redacted that it was nearly a black page.
Also of note, banks were quoted as saying they would not bid on WAMU until
they saw what would happen with TARP. Congress was debating the issues
and it was expected to pass at any time. TARP passed 8 days after WAMU
Four banks submitted their plans by the Wednesday due date, and the same
day JPMorgan was notified it had won. The FDIC declined to name the other
The FDIC updated their billing process on Sep 23rd, the same
day they secretly put WAMU on the auction block. The seizure was later
moved up one day due to a “leak”-- the secret auction was no longer a
secret and had been leaked to the press. Though widely discussed in the
press, the source of the leak has not been identified.
FDIC Purchase and Assumption Agreement
NOTE: It cites Schedule 3.1a as a list of the assets to be purchased.
After someone wrote the FDIC wanting a copy of that list, they then changed
the FDIC website indicating that it was a scrivener’s error and no 3.1a
document exists. It appears there is NO LIST of what was included in the
of Assets & Liabilities in Liquidation (unaudited) FDIC document
It should be noted that the value placed on Washington Mutual Bank varies
widely, depending on the source. The figures cited by the FDIC are noted
to be "unaudited".
divulges they knew about the seizure Sep 19th, and it actually
sounds like the “deal was done” before the auction began.
Day 26 FEB 2009 08:30
Charlie Scharf (JPMorgan) said, at their Investor’s Day Conference, they
were notified about the bank seizure on Sept. 19, 2008. Fast forward to
3 hours 14 minutes to hear the following excerpt:
"We did a lot of work over a long period of time...really analyzing
the company, and then when the deal got done, it happened very very quickly.
the call from the FDIC on a Friday (9-19), they came to meet with us on
a Monday (9-22), the deal was announced Thursday night (9-25). the deal
was announced Thursday night, that night as Mike mentioned Rick raised $11B of capital, and then Friday morning, Todd
was in California and Gordon was in California, different places cause
uh Irvine vs. San Fran.
was out in ah Seattle, Frank came out to Seattle, J (Dimon) was out in
Seattle, the place…you know it was ours the next day...very, you know
non traditional transaction with immediate ownership"..."the
business was seized by the FDIC" -- Charlie Scharf, Chief Executive
Officer of Retail Financial Services.
Charlie Scharf Speaking:
A little known fact is that Washington Mutual had $50 Billion cash available
from the secondary Fed Reserve Window in San Francisco. One must wonder
whether the OTS and the FDIC knew about this. It is apparent the FDIC
did not know about the $4 Billion dollar deposit, as they later tried
to claim it in bankruptcy court. JPM
also tried to claim this money in court. The court determined the money
belonged to the parent company, Washington Mutual Inc. (WMI).
It appears JPMorgan may have known well in advance of the plans for seizure
(by some reports three weeks in advance). It is unknown whether the other
banks were also unofficially informed of the seizure, well in advance. Was the auction a fair playing field? Did all
the bidders have the same information JPMorgan had?
Washington Mutual was not aware of these backroom discussions
between JPM and the FDIC. In fact, Washington Mutual, through Goldman
Sachs, was trying to sell the bank on the open market to those very same
banks, but curiously their attempt drew no bidders.
Why would a bank bid openly with Washington Mutual when they
knew the FDIC was offering a deal, behind Washington Mutuals back for
only the choicest assets instead of the entire bank? The FDIC was offering a much better deal, then Washington Mutual
was able to offer, you see the FDIC offered the bank for the price of
$00.00. Their behind the scenes
discussions interfered with the banks ability to sell itself.
Did JPM know three weeks prior to Sept 25 of a possible FDIC seizure?
Was the bidding process fair and impartial? That is an issue for a Congressional
Hearing to decide. The entire matter is currently under a clandestine
investigation. Many shareholders
have contacted their Congressional Representatives requesting an open
Congressional Hearing on this matter.
In most cases they have received no response from Congress.
Sheila Bair said, shortly after the seizure of Washington
Mutual, the seizure was stepped up due to a leak. “Washington Mutual was on the radar for some time, said Bair,
who noted that the timetable for the seizure was bumped up due to a potential
media leak. She added that all deposits, both insured and uninsured are
But here she says it was stepped up due to its deteriorating
condition. She said that “the bank’s rapidly
deteriorating condition prompted regulators to seize it Thursday, and
not on a Friday as is typical for bank closures. “ Which is it Ms. Bair? On the date of seizure (earlier in the day
than the bank was seized), CNBC aired a short news clip about a bank run
they identified as Washington Mutual, and then “broke” for commercial. When they came back online they noted that
the previous story was inaccurate, and the bank run was at a different
bank (Indy Mac?).
News stories often report that Washington Mutual was seized
after withdrawals of $16.7 Billion over a nine day period which began
on Sep 15th. As we now know, there were plans to seize Washington
Mutual before the 25th. In
fact, JPMorgan was notified Sept 19th about the seizure, and
indeed knew about the prospects for seizure three weeks in advance. No information has been released regarding
the situation at the time the OTS began making plans to seize the institution.
Later, Paul Kanjorski stated on national television that there was a $550 Billion
drawdown in the market at this time.
What effect did this have on the seizure of Washington Mutual?
09/18/08: It has recently come to light that on the 18th of September
there was a 550 Billion dollar drawn down on money market funds during
a 2 hour period, and there was panic among regulators
(Frontline--PBS). This indicates that most, if not all, banks
were under significant pressure at that time. There is much discussion
about the veracity of this statement by Paul Kanjorski.
Why was Washington Mutual singled out when this draw down was occurring
at all banks? There was a systemic country wide financial meltdown; why
was WAMU seized? Washington Mutual was liquid and well capitalized. The
seizure was unjustified, premature, and unwarranted.
The FDIC arranged a similar transaction in the case of Citigroup's acquisition
of Wachovia for $2.1 billion. It was in the form of a forced sale, under
the threat of seizure. The agreement reached would have required federal
assistance to mitigate risk to Citigroup. However, Wells Fargo offered
$15 billion to purchase Wachovia outright shortly thereafter despite Citi's
signed deal. A legal battle ensued, the FDIC maintained
that it stood behind Citigroup and the deal it had brokered, but Wells
Fargo was the eventual victor due to their superior offer.
Perhaps the differentiating factor was the fact that the sale of Wachovia
was done publicly, over a period of a week or more, rather than secretly
over a period of hours, as the WAMU "deal" had been completed.
Stock market charts show that the day following the seizure of WAMU, the
markets took a nosedive. This is thought to be because investors felt
they could no longer trust the government, since they had become erratic
in their treatment of the banking crisis. The OTS/FDIC caused the very
thing it is supposed to prevent: a bank panic. The premature seizure destroyed
the value of WaMu's bondholders and stockholders, at the same time destroying
confidence in the market. Why invest in any publicly traded company if
the government can arbitrarily seize your interest, leaving you nothing,
or perhaps pennies on the dollar?
Note the market performance since the 09/25/2008 seizure:
image to enlarge
How J.P. Morgan
Raised $11.5 Billion in 24 Hours
Three weeks before JPMorgan bought WaMu’s deposits for $1.9 billion, officials
at the Federal Deposit Insurance Corporation had called JPMorgan to say
that the FDIC was carefully monitoring WaMu and that a seizure of its
assets was likely. There have been no news articles indicating that the
other banks were notified at that time.
Since the seizure, JPMorgan and the FDIC have challenged Washington Mutual
Inc (the Holding Company that owned WMB) on tax benefits of writing off
its losses prior to the seizure.
01/22/09: JPMorgan objects to having to show what they bought (file claim)
by 3/31/09. That may be because
they can't; there is no list in the Purchase and Assumption Agreement
(3.1a), although the purchase agreement cites there should be. The purchase
agreement is incomplete. JPMorgan objected to having to show any claim
by the claim filing deadline. Their objection was overruled by Judge Walrath,
the judge presiding over the bankruptcy case.
against the FDIC
02/05/09: Weil and Gotshal have filed a claim against the FDIC (December
30, 2008). WMI was given $0.00
for the bank, despite a book value well over $20 billion at the time of
seizure. The FDIC failed to get a reasonable price, even though they are
required by law to maximize the return on the assets seized as well as
to minimize the impact to the FDIC fund.
There are many differing opinions on what the value of the bank
was, but of the sources we could find, none felt the bank was worth a
mere $1.9 Billion. JPMorgan got the bank at a substantial discount, as
they have documented well in their SEC filings. They even booked a $1.9
Billion gain the next quarter – not a bad return for three months. The
FDIC also gave JPMorgan many subsidiaries.
Some of those subsidiaries may not have been on the banks books,
and in fact may have belonged to the parent holding company, Washington
Mutual Inc (WMI). WMI filed a claim against the FDIC's receivership
on 12/30/2008. According to a
Weil & Gotshal representative, the claim submitted to the FDIC was
denied in late January 2009.
SEC did not do its job; illegal short selling damaged
7/21/08: SEC bans “naked” short selling in certain
financial stocks. Washington Mutual is not included on the list.
9/17/08: SEC bans “naked” short selling of all
9/18/08: SEC bans short selling of 799 financial companies, including
General resource on the surrounding economic legislation and SEC and FED
the FDIC do their job properly after the seizure of Washington Mutual?
Sheila Bair, in a 60 Minutes episode which aired on March 8, 2009, said
that the FDIC did not shutter big banks. Washington Mutual was a big bank
and the fallout from its seizure was widely felt in the US markets and
indeed around the world. Stockholders were essentially wiped out in this
seizure, due to the fact that the FDIC permitted the deal to be written
with no regard to provisions for the stockholders. Although it is unknown
exactly what the total losses were, it is estimated it could be as high
as $30 billion. Many of these stockholders were Pension Funds, large institutions,
as well as individuals 401K's, IRA's and other private accounts. The question
at this point is whether the FDIC acted appropriately in only getting
1.9 Billion dollars, and allowing the stockholders to be left out of the
transaction, and completely out in the cold. Many institutions were severely
impacted by the sale agreement the FDIC arranged. The sale agreement had
far reaching, adverse effects both on portfolios and the market in general.
9-17-08: A WSJ article states that WaMu has hired Goldman Sachs to find
a buyer of the bank.
9-18-08: WaMu's rating slips to a 4 and is placed on the FDIC's watch
list, a fact kept secret at the time to prevent a self-fulfilling run
on the bank. A 4 rating reflects financial, operational or managerial
weaknesses that threaten a bank's financial viability.
9-19-08, Friday: FDIC talks with JPM about WaMu. (From JPM presentation
9-22-08, Monday: FDIC meets with JPM. (From JPM presentation)
9-24-08, Wednesday: 4 banks reportedly submitted bids/plans to FDIC by
the deadline set by the FDIC:
FDIC Chairman Sheila Bair told reporters on Thursday that after an open
process to find a buyer failed, the agency turned to its secretive auction
process in which bidders place their offers on a secured website. The
auction turned out to be not so secret when a media leak prompted early
seizure of the bank. The "leak" has not been identified.
Which other organizations bid for WaMu, and the contents of those bids,
have not been revealed by the FDIC. Here is an abbreviated timeline of
9-24-08, Wednesday 6:44PM: JPM submits bid to FDIC of $1,888M
9-25-08, Thursday: OTS seizes WaMu and gives it to FDIC
9-26-08, Friday: FDIC sells WaMu to JPM for $1,888,000,000.
2-26-09: JPM states that the WaMu transaction was 'very non-traditional'.
(From shareholder presentation).
Did the FDIC
do a fair and impartial auction?
Were all banks given the same information at the same time? By some reports
JPMorgan knew of the auction 3 weeks prior. Did other banks have that
same advantage? JPM was notified on Friday, 9-19 that they would get the
bank. That was days before the auction officially began. Of note, JPMorgan
raised approximately $11 Billion for the purchase, yet they managed to
buy the bank for a mere $1.9 Billion. The auction permitted the banks
to bid $0 for the bank, and totally disregard the stockholders and bondholders.
Although stockholders and bondholders are not technically the FDIC's responsibility,
was it wise or fair to totally disregard the interests of these stakeholders?
FDIC regulations as quoted from their official website:
12 U.S.C. 1821(d)
13) ADDITIONAL RIGHTS AND DUTIES.--
(E) DISPOSITION OF ASSETS.--
(i) maximizes the net present value return from the sale or disposition
of such assets
(ii) minimizes the amount of any loss realized in the resolution of cases
(iii) ensures adequate competition and fair and consistent treatment of
Did JPMorgan Chase (JPM) Profit from the purchase of WaMu's banking assets
for $1.888 Billion?
JPMORGAN CHASE Acquires the deposits, assets and certain liabilities of
WASHINGTON MUTUAL’S banking operations
JPM's Bid For WaMu via FOIA Request
What Did JPM Purchase?
It is still not clear exactly what JPM purchased from the FDIC on 09/25/08,
because their Purchase and Assumption agreement didn't disclose exactly
what was sold, other than as stated in paragraph 3.1, "...all of
the assets (real, personal and mixed, wherever located and however acquired)
including all subsidiaries, joint ventures, partnerships, and any and
all other business combinations or arrangements, whether active, inactive,
dissolved or terminated, of the Failed Bank whether or not reflected on
the books of the Failed Bank as of Bank Closing." This statement
clearly did not address the possibility of joint ownership of assets by
Washington Mutual Bank (WMB) and their holding company, Washington Mutual
Inc. (WMI). The seizure of assets which were not on WMB's books leaves
open the real possibility that some of those assets actually belonged
either solely to WMI or were owned jointly and as such were not rightfully
It appears that that Schedule 3.1a had been intended to be more specific
regarding the assets sold. This section is missing, despite being referenced
repeatedly in the version of the document posted initially on the FDIC's
An early rough draft was obtained by FOIA request:
What Did JPM Gain?
JPM had long coveted WaMu's West coast branch network, and had earlier
offered $8 per common share for the entire company, an offer that would
have assumed all debt and preferred stock of both WMB and WMI. It was
rebuffed at the time for being too low; it was less than WMI common stock's
market price at that time.
Through the seizure and acquisition,
JPM expanded its' banking footprint into states with little Chase coverage.
These include Washington, Oregon, California, and Florida. Along with
$307B in assets they acquired $188B in deposits, 2239 branches, 4,932
owned and branded ATMs, and 43,198 employees.
They were also given the ability to return any branches they
didn't want to the FDIC. JPM has indicated it would lay off 9,200 employees
and recently indicated they would cut another 2,800 positions through
attrition; the cuts total nearly 30% of WaMu's employees. Included in
the purchase price was $1.5B of real estate or other assets (JPM's 10K,
12/31/08, p 82) and WMB's credit card business.
JPM's 10K, 12/31/08
Listed figures are as of 06/30/08 as stated in the OTS fact
WMB's credit card business had been expanded on June 6, 2005 with the
purchase of Providian Financial for $6.45B. JPM assumed both the WMB and
Providian credit card subsidiaries along with all other subsidiaries of
the bank. $10.6 Billion in credit card receivables were included.
JPM's Loan Portfolio
JPM stated in their conference call on 09/25/08 that the transaction would
be, "Accretive immediately, 50 cents" (per share), and that
it would result in a "Net cost savings (of) $1.5B, conservatively."
"$176B (of) home loans (were) assumed", with "$30.7B losses
"Just shy of $300B of assets" were assumed, with net assets
of $31B after deducting liabilities. JPM then stated they would mark down
$31B related to the loans. Coincidence? JPM can use those write downs
to offset $31B in profits, resulting in a significant tax savings. At
a 35% tax rate, (general business tax rate) this represents a tax savings
of approximately $10.85 Billion.
When asked about loan losses if the economy were to worsen, JPM stated
that even under the pessimistic assumption if the loan losses exceeded
expectations, the worst they would do would be to end up flat. Why? Due
to the fact that the other WMB assets would still be making money. JPM
stated, "This transaction's generating $12B of capital over the next
3 years.” (That is after taxes.) The WMB acquisition would result in,
a "stable, predictable earnings stream" due to retail customers.
JPMorgan Chase acquired the banking
operations of Washington Mutual Bank for $1.9 billion. The fair value
of the net assets acquired exceeded the purchase price which resulted
in negative goodwill. In accordance with SFAS 141, non-financial assets
that are not held-for-sale were written down against that negative goodwill.
(Negative goodwill is a positive gain on a balance sheet due to gains
that cannot otherwise be accounted for.)
The negative goodwill that remained after writing down non-financial
assets was recognized as an extraordinary gain."
10K for 12/31/08; p 26, note (d)
2008, JPMorgan Chase acquired the banking operations of Washington
Mutual Bank for $1.9 billion. The fair value of the net assets acquired
exceeded the purchase price which resulted in negative goodwill. In accordance
with SFAS 141, non-financial assets that are not held-for-sale were written
down against that negative goodwill. The negative goodwill that remained
after writing down non-financial assets was recognized as an extraordinary
gain in 2008.”
After writing down part of the negative goodwill, JPM recognized an extraordinary
gain of $1.9B. Without this extraordinary gain due to Washington Mutual,
JPM would have reported a loss for the quarter.
FDIC accounting report on receivership detailing assets transferred
JPMorgans hedge fund was amazingly unscathed by the economic turmoil.
Good trading sense or is there more to it?
So to sum it up, JPMorgan Chase acquired a massive
branch and credit card network that augmented their footprint in areas
where they were weak. For $1.9B, they acquired 2,239 branches in lucrative
markets that would have cost many billions to construct themselves. They
obtained an immediate $1.9B financial gain on the transaction, have a
future tax savings of $10.85 Billion, and expect to make an additional
$12 Billion in after tax profit over the next three years. And after that
they are left with a profitable bank that will continue to generate billions
of dollars of profits every year for the foreseeable future.
The question remains. Was this a fair auction? Did government regulators
do their jobs properly? Was Washington Mutual fairly compensated for its
Should Washington Mutual have been seized at all?
You be the judge.
Latest Developments and Links:
1. JP Morgan responsible for
destruction of financial system:
2. WSJ FDIC memorandum:
3. Geithner, Paulson named in
$200 billion lawsuit
4. -WAMU was in a lot worse shape
5. Feds say WAMU WAS the cause
7. JPM Shareholder Pamphlet::
8. WMI Documents:
9. Battle Brewing over Fire Sale
of WaMu Banking Assets:
10 JPM Lawsuit against WMI:
11. NY Times Slams the OTS: