In the biggest bank failure in U.S. history, Washington Mutual Bank was seized late Thursday by federal regulators and immediately sold to JPMorgan Chase & Co. for $1.9 billion.
Customer deposits will be secure, regulators said, but shareholders of the nation's largest savings and loan will see what's left of their holdings wiped out. WaMu shares have lost 88% of their value this year amid huge losses in the bank's mortgage loan and credit card businesses.
Although not unexpected, the failure is the latest in a series of collapses that have shaken the financial world and may add new urgency to efforts by Congress and the Bush administration on a $700-billion financial sector bailout plan.
Federal regulators said the seizure was prompted by growing concerns over the viability of WaMu, which has nearly one-third of its more than 2,200 branches in California.
Nervous depositors had withdrawn $16.5 billion of their money in the last 10 days, and a full collapse could have devastated the federal banking insurance fund, regulators said.
"I was worried," said Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. "We needed to protect the depositors and the taxpayers."
With the government-brokered sale to JPMorgan, however, depositors will have full access to their money, she said, even the funds that weren't fully insured. JPMorgan, meanwhile, will get the West Coast foothold it had long coveted.
"It will be a seamless transition," Bair said. "There will be no interruption in services and bank customers should expect business as usual come Friday morning."
The "run on the bank" phenomenon that hammered WaMu followed a similar outflow at IndyMac Bank, which was taken over by federal regulators in July even as the Pasadena bank was trying to find a buyer for itself.
Both were brought down by the kind of lending practices that now jeopardize the global financial system -- including granting mortgages to borrowers without demanding sufficient collateral or proof of their ability to make payments. As housing prices have tumbled, many of these borrowers have defaulted on the loans.
Before the mortgage meltdown, WaMu was a major originator of subprime and other risky loans. Of the $181.5 billion in home mortgages that WaMu had on its books as of June 30, $52.9 billion were adjustable-rate loans in which borrowers had an option to make lower payments, but exercising that option also put them in deeper debt and, many believe, more likely to default.
