I doubt that name would stick, its too long already.  I like the name of WaMu, but Washington Mutual is boring.  Expect this purchase to eliminate the WaMu brand altogether.  

So once again, we do the format of the financial crises analysis:

What Happened?
WaMu (slogan: “Whoo Hoo!”, no joke) was one of those banks that bet big on real estate.  WaMu is technically a Savings and Loan, not a bank, making their regulation process a bit different.  But for now we’ll ignore this fact because its not really relevant.  Like Countrywide or Wachovia’s Golden West, WaMu had a huge presence on the west coast.  California remains one of the worst real estate markets, with values plummeting 40%+ in some areas.  Needless to say WaMu had to readjust the values of their mortgages down so much that the company became basically worthless.

Like all the other banks, it became necessary to raise more cash to back up these bad loans.  They considered a sale earlier this year, but received an infusion of capital (that’s cash) from new investors like TPG, a private equity firm.  At the time, JP Morgan Chase offered as much as $8 a share for the company, but this offer was declined.  JP Morgan will be pleased that it was turned down.

On September 17th, WaMu announced they were hanging a for sale sign on their doors.  On September 25th, before any deals could be made, the FDIC and OTS (Office of Thrift Supervision) took control over the bank because of imminent failure.  JP Morgan swooped in again, this time with the best offer, of $1.9 billion.  That is about $1.11 per share.  Compare that to $8 a share earlier this year, and that cost would have been about $13.7 billion.  Talk about a bargain!  Just for fun, I’ll tell you the stock was trading as high as $35 a share last summer.  A buyout then would have cost almost $60 billion.

How Does JP Morgan Chase Pay for This?
At the time of this writing, those details weren’t available.  But there are two common ways to buy a company.  First is the all cash deal.  $1.9 billion is not much these days so JP Morgan could simply write a check.  Then the shareholders will get their piece of the check; that will be about $1.11 for each share owned.  The second option is the stock exchange.  What this means is JP Morgan would issue new stock in their company, and trade it for all the WaMu stock.  JP Morgan stock was trading around $40 so a WaMu shareholder would get one share of JP Morgan stock for every 36 shares of WaMu they owned ($40/1.11 = 36.036).  This second method is often easier to do, especially the larger the transaction gets.

JP Morgan will also issue new stock for sale on the market.  This is raise the sufficient cash needed to back all those bad loans they just inherited that WaMu couldn’t do.  If you’re worried about the values of those loans, to be safe JP Morgan has already written down their value another 10%.  Might not be enough, might be more than enough, but it was a good idea to go ahead and take this accounting “hit” now.

Who Loses Here?
Shareholders of WaMu.  Remember I said the stock was trading for $35 last year, and now they just got bough for just over a buck.  Those people that bought in earlier this year like TPG lost billions too.  So if you owned WaMu stock, or WaMu bonds even, you lose.

How Much Did the Taxpayers Lose?
Nothing.  The FDIC isn’t just an insurance group, they are also a regulatory body of the government.  They only acted as the regulator, and then the broker this time.  No tax payer money was lost in this deal.

What About WaMu Customers?
Its business as usual.  Branches won’t be closing, and your deposits are all safe.  The transition is silky smooth in these cases.  By now, the FDIC and OTS have a lot of experience in helping the switch.  No worries WaMu customers, you’re good.  

The Weakonomist’s Take:
Remember when I said Wachovia was going to hunker down and raise cash to buy up all the failing banks?  I was dead wrong.  Wachovia hunkered down, but they’re just staying in that hunker position, whatever that is.  

Its all the other banks that went on a spending spree.  I knew everyone would be buying, it was just a matter of who would buy what and when. Here’s what we have so far:

Bank of America:  Bought Contrywide and Merrill Lynch
JP Morgan Chase:  Bought WaMu and Bear Stearns

We’ll have to wait and see what happens next, I now don’t think WaMu will be the last.  For now though, it was the biggest bank failure in history.

Read

I do want to take this time to open up the floor for questions.  I don’t know everything you might hear in the news, so I might not cover everything you’ve heard or don’t understand about these deals.  Leave a question in the comments and I’ll do my best to answer it there, or in a new post.  Thanks!

Related posts:

1. Another Buy: Citi Wants a Piece of Wachovia’s Badonkadonk
2. What Happened With the Investment Banks?
3. The Weakonomist Reads a Book: The Tycoons
4. Bear Stearns sets a fine example
5. Trouble in Finance, Industry Shakedown Continues

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