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Washington Mutual - How WaMu Went Bankrupt

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Man Entering WaMu

(Credit: Robert Giroux/Getty Images)

What Is Washington Mutual?:

Washington Mutual is a commercial bank focused on individuals and small businesses. At the end of 2007, it had more than 43,000 employees, 2,200 branch offices in 15 states and $188.3 billion in deposits. Nearly 60% of its business came from retail banking, 20% from credit cards, 14% from home loans and 6% from commercial lending. While it was its home loan business that caused it to go on life-support, it was an old-fashioned, panic-driven run on deposits from its retail banking side that delivered the death knell.

WaMu's Decline:

WaMu was fine until August 2007, when the secondary market for mortgage-backed securities disappeared. WaMu could not resell these mortgages, and this, combined with the housing decline, prevented it from selling new mortgages and taking in new cash.

By Q4 2007, it had to write-off $1.6 billion in defaulted mortgages. It also had to set aside additional cash to provide for future losses, resulting in a total net loss for the quarter of nearly $2 billion.

As a result, WaMu reported a net loss of $67 billion for 2007, after just reporting a profit of $3.6 billion for 2006. (Source: WaMu 2007 Annual Report)

WaMu Was Hit Hardest by California Housing Decline:

Nationally, home values increased until 2006, reaching a peak of 20% year-over-year growth in 2004. But by the second half of 2007, home values had started declining. By the end of 2007, the national average home value was down 9.8% - which hadn't happened since the Great Depression.

WaMu did a lot of business in California, where the housing market did worse than in other parts of the country. By the end of 2007, home inventories were at 15 months, compared to 10 months nationally and six months during normal times. Although WaMu only wrote 20% of its mortgages at greater than 80% loan-to-value ratio, by the end of 2007, many loans were more than 100% of the home's value.

Lehman Brothers Bankruptcy Caused Run on Deposits:

On September 15, Lehman Brothers declared bankruptcy. This panicked depositors, who withdrew $16.7 billion out of their savings and checking accounts over the next 10 days. Since this was about 10% of WaMu's deposits, the Federal Deposit Insurance Corporation (FDIC) said the bank had insufficient funds to conduct day-to-day business. The FDIC started looking for buyers.

J.P. Morgan Bought the Bank for $1.9 Billion:

On September 26, the FDIC took over the bank and sold it to J.P. Morgan for $1.9 billion. The cost is actually higher, since J.P. Morgan will need to write down $31 billion in bad loans and raise $8 billion in new capital. Bondholders will lose all $30 billion in their investments in WaMu. J.P. Morgan got a good deal, since WaMu had about $300 billion in assets. However, due to the current credit crunch, no other bank bid on WaMu, including Citigroup, Wells Fargo and Banco Santander South America. (Source: WSJ.com, "WaMu Is Seized," September 26, 2008)
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