Banking: WaMu settles with J P Morgan Chase and FDIC

The FDIC announcement of the sale of the two banking operations of the holding company was made by FDIC on 25 September 2008. It was one of the earliest casualties of the then growing financial crisis.

Two banking operations were sold: Washington Mutual Bank, Henderson, NV and Washington Mutual Bank, FSB, Park City, UT - collectively known as Washington Mutual Bank or WaMu.

The banks were closed by the Office of Thrift Supervision and FDIC and sold to JP Morgan Chase for USD1,900 million. According to the FDIC notice "Washington Mutual Bank also has a subsidiary, Washington Mutual FSB, Park City, Utah. They have combined assets of USD307,000 million and total deposits of USD188,000 million."

Claims by equity, subordinated and senior debt holders were not acquired. FDIC Chairman Sheila C. Bair said at the time "WaMu's balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses." Unusually, and perhaps because the failure cost FDIC nothing, the media information was not in the standard form adopted in the case of bank failures, even when there is a sale. FDIC considered it had done a great job in protecting depositors and its own fund.

Shareholders in WaMu Inc, which saw the value of their shares evaporate in a matter of minutes, did not agree. WaMu Inc entered recievership under Chapter 11 of the USA's insolvency laws on 30 September 2008, just five days after what its shareholders considered to be a forced sale.

WaMu was the largest savings and loan in the USA and its failure sent shockwaves through an industry that could still remember the savings and loans crisis of three decades earlier. Worse, WaMu was subject to a large class-action by by shareholders who claimed that they had been misled as to the value of assets in its portfolio. They pleaded in aid a statement by the New York Attorney General made in November 2007 that he had issued proceedings against two other companies, First American Corporation and eAppraiseIT in which it was alleged that they conspired with WaMu to inflate the valuations of property. The shares began an inexorable slide from about USD30 before the announcement to close to zero after the sale of the businesses.

By the end of September 2008, WaMu was a shell the primary asset of which appeared to be a claim for the refund of the bank's deposit with FDIC and a tax refund collected by J P Morgan Chase and which WaMu said was an asset not included in the sale.

When FDIC sold the bank, the nett effect was to wipe out any claim made by low ranking - unsecured - creditors and shareholders. But its senior debt remained in place - and it's been traded ever since - and in recent weeks at little discount.

J P Morgan argued that the tax claims were part of the assets it purchased. The deal settles on the basis that out of a total tax refund of USD5,600 million it will now retain "only" USD2,100 million - the rest will be more or less equally divided: half direct to the holding company - and half to FDIC which will use it to settle creditors' claims.

The agreement remains subject to Court Approval in the Chapter 11 proceedings but it's unlikely that it will be rejected.

And with that, the USA's (then) biggest bank failure will be close to the end of its story.