Revisiting WaMu

By Felix Salmon
May 26, 2009

JP Morgan, having lopped $29.4 billion off the value of WaMu’s loans when it took over the troubled lender, now reckons it’s going to get the lion’s share of that money back:

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

WaMu failed in the middle of the sleepless craziness following the Lehman collapse, and in hindsight might well have been at least as much of a factor in the scary gapping-out of Libor as Lehman was. It’s worth remembering that these are the only two US financial institutions where senior lenders took a haircut — and in both cases the senior lenders were pretty much wiped out. In other bank failures, even the junior lenders generally emerged unscathed.

It increasingly seems as though a panicked FDIC thrust WaMu into the arms of Jamie Dimon, who could — and did — ask for pretty much anything he liked, including the right not to have to pay back any of WaMu’s creditors. The result was that the bank wholesale-funding market went straight into crisis: one sui generis default (Lehman) might have been navigable, but when you have two in as many weeks, it’s pretty clear which way the wind is blowing.

We’ve had endless rehashings of the weekends leading to the Bear Stearns and Lehman Brothers failures, but I’ve seen much less on the subject of WaMu, which is equally if not more fascinating and just as systemically important. The news out of JP Morgan that it massively undervalued WaMu’s loan books certainly seems to indicate that the likes of John Hempton have a point when they say that Sheila Bair got this particular decision spectacularly wrong, and in doing so put the entire US retail banking system on a much more fragile footing than was necessary.

Bair also took a relatively consumer-friendly bank (WaMu) and forced it to adopt the practices of a relatively consumer-unfriendly bank (Chase) — with predictable results: Chase is now telling former WaMu customers that even if they have directed the bank not to let their accounts go overdrawn, the bank can still push the account into overdrawn territory anyway, and, of course, “will assess an Insufficient Funds Fee” for doing so.

It’s clear that the big winner here is JP Morgan, but the rest of us — taxpayers, WaMu account holders, WaMu creditors — increasingly look like very big losers.


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Boy your telling me!
I just received today a notice stating they are going to be raising my APR to 25.24 percent from 13 percent and I have never missed a payment on any of my cards.

I can assure you that I for one will be paying the card off in full by the end of the month (has 370 left on it) and canceling it. I have a feeling there will be a bunch more doing that as well

Posted by Chris | Report as abusive

I agree that the WaMu seizure and sale was a mistake, but I think that it follows from Lehman. Now being quite aware that mergers were the only option for large banks and financial entities, they didn’t want to wait and chance a Lehman like situation, where the B of A and Barclays deals didn’t work out. So, they proactively seized and merged, scaring the hell out of bondholders and creditors.

Oddly, Lehman had scared investors that the government wasn’t guaranteeing the unwind. Now, WaMu scared investors that, even if the government got involved, they were in for a hellish ride of possible losses.

Of course, if you believe as I do, that the government needed to guarantee everything right off, like Geithner, then both of these actions are terrible mistakes.However, in both cases, Lehman and WaMu, I can understand why the government acted as it did. Too bad that’s not going to stop them from looking like idiots in the history books, because a good plot needs dunces by which to measure the ultimate heroes intellect.

My question is where can i find an honest government officials nowaday? including those that we were voting for they are no long to be an honest breed.

Posted by jonathan | Report as abusive

Well-written perspective, Mr. Salmon.
I hope we will see justice in Hon. Walrath’s court in favor of WaMu for creditors and equityholders who were effectively hoodwinked by FDIC and JPMorgan Chase.

Posted by AndyXOM | Report as abusive

The truth will come out, WAMU was illegally seized and given to JPM, it was used to prop up the failing JPM and scare the American Tax payers into supporting the TARP.

Felix, are you claiming that in September 2008 JPM should have priced WaMu’s loans under the assumption that the Fed would reduce the Federal Funds Rate to 0 for the indefinite future?

I don’t think Dimon would have been doing his job, if he had assumed current circumstances in pricing the assets.

Posted by Anonymous | Report as abusive

With all the suits and countersuits now flying around over the WaMu seizure, perhaps what surprises me more than anything else is that I haven’t yet seen anyone directly challenging the OTS/FDIC seizure action as being illegal under our Fifth Amendment. While they have the authority to seize insolvent banks in order to protect our banking system, I view the seizure of a solvent bank, which was well-capitalized by regulatory standards at the time, as clearly exceeding their statutory authority. And especially so, when it’s obvious they were already negotiating the sale of the company BEFORE they saw the need to seize it (based on my understanding of the sequence and timing of events).

Posted by Greg | Report as abusive

WAMU was seized because of liquidity reasons. They were rapidly losing the ability to fund and half of the new Fed / FDIC programs weren’t in place at the time. I suspect that they had pledged money to the fed / fhlb who tightened collateral requirements on them. The bottom line was that there was nobody willing to buy the bank holding company, and the FDIC can’t force a bank holding company into receivership, only the bank. Secondly JP Morgan’s price was dictated by the fact that the loan losses would not be tax-deductible at that point.

Also you made a pretty specious claim in regards to bank failures, please cite that. “In other bank failures, even the junior lenders generally emerged unscathed”. See this WP that says no such study has been done: 2005/jun/CFRSS_2005_Bliss_Kaufman.pdf

See this chart to see FDIC losses as a percentage of total assets. ging/Chron/appendixes/table_fdic/index.h tml

If the FDIC is suffering a loss due to national depositor preference the junior senior and equity holders have all been wiped out. on a MTM / Fire-sale basis very few banks in crisis are going to be sold at any price to fully compensate junior lien holders.

Posted by renholder | Report as abusive

Great article in analyzing the details and effects of the Wamu seizure. Mainstream media has been reporting this as simply a bank failure without analysis of the ripple effect it has created in the economy. Right off the bat, reports are incorrect in stating it was a failure when the seizure effectively removed any chance to fail. Basically, the seizure was a preemptive strike due to FDIC’s fear of being unable to cover the deposits of a bank as large as Wamu.

Out of this fear, resulted gross errors in decisions that brought down the US and world economy. The decision to seize Wamu effectively destroyed creditors and the bond market. When investors see that it is possible for even safer investments to be wipe out they start pulling their money out. Hence, post seizure you see the US economy decline to its lowest point so far during this recession.

Obviously the sale of Wamu was a rushed and uncalculated move. It does not make sense to sell over $300 billions in assets, 2200 branches in premier locations unpenatrated by JPM, $9 billion credit card service, $188 billion in customer deposits, $29 billion gain on the acquired loans over their lifetime, and 4 BILLION IN CASH…all for a mere $1.9 billion when each item alone is worth more than the sale price.

Posted by gx | Report as abusive

Thank you Felix for keeping the focus on this greatest of all bank robberies. Here’s a link to the best video I’ve found on the subject:

Posted by Robbed | Report as abusive

Can we quit saying it was ceased because of liquidity purposes.

It had 50 billion of liquidity at quarter end – and 12 billion ran (at least half that because of self-fulfilling rumours it was going to fail).

However the money that fled was the bulk of their non-insured deposits. THey had enough liquidity to cover a run by ALL of their non-insured deposits.


I will tell you one thing about all of this: BS! FDIC took over WAMU and GAVE IT to JPM for free. When is the media going to pick this crap up because if this doesn’t show how nothing has changed since OBAMA hit the office I don’t know what else will. Us shareholders that have held onto this stock for years are left with nothing except for .11 a share. Let’s not forget the fact that JPM is holding 4.4 BILLION in WAMU money and won’t give it back. Let’s not forget that JPM short WAMU share to bring the price down. Hey FDIC… what about Citi when it’s share price was at .97 and members withdrew accounts?
Thanks for writing this article but this case will never get the press it needs because the damn government is in bed with JPM.

I think this is all seller speak from Dimon. The assumptions they used when writing down the WaMu portfolio by 29b were unemployment at 8% and peak to trough declines in house prices of 37%. Of course they will generate cash flows from mortgages, but they will also incur in painful costs that will leave them losing money at the end of this period. The wording of all these releases is very ambiguous because their goal is to push their stock price today hoping for the future to be better.

Posted by Cesar | Report as abusive

I tend to believe that JP Morgan Chase is culpable and that Dimon is probably at the bottom of the spider’s trap. But instead of crying in our beer about it (I lost a lot of money in WAMU bonds when the FDIC double-dealt it into JPM’s hungry hands), why not return to the tenets of our founding fathers: revolution, but a quiet one. Let’s convince every depositor of the original WAMU to “switch rather than fight” to turn an old cigarette slogan on its head. Let us agree to close all our accounts with JPM and find another bank. Charles Schwab anyone? Or choose a local bank. You know the kind, the one just around the corner with ties to your community, like WAMU had before they got greedy. Or do you really believe that a bunch of New York bankers have your best interests at heart? Adrian

Posted by Adrian Magnuson | Report as abusive