FDIC take-over of Washington Mutual Bank

On September 25, 2008, the Federal Deposit Insurance Corporation (FDIC) seized all of the deposits and assets of Washington Mutual Bank and sold them to J.P. Morgan Chase for $1.9 billion USD. Such a deal gave the consumer banking arm of J.P. Morgan Chase highly sought after markets in California, Florida, and Washington state. With it, J.P. Morgan Chase assumed an estimated $296 billion in assets and $265 billion in certain liabilities (any debt below secured debt in priority of payment was not included), for a net gain of approximately $31 billion. In a presentation to shareholders, J.P. Morgan writes that the deal is financially compelling as it is immediately accretive to earnings. This shouldn't be a surprise as J.P. Morgan can leverage off of Washington Mutual's large retail deposit base, which they got for a pittance.

The purpose of this blog entry is to express my outrage that debtholders were wiped out in the deal. It would have been better for debt investors to have had Washington Mututal gone bankrupt so that they would have recovered some (if not all) of their investment back. Contrary to media hysteria, such a bankruptcy would have been benign with respect to most Washington Mutual customers. The FDIC had increased deposit insurance to $250,000 per individual. Almost no customer would have lost a cent of their deposits.

What was also surprising was the timing of the take-over. That same week, the then CEO of Washington Mutual, Alan Fishman, had just declared that the bank was financially sound. When the FDIC deal had been made public, he was on a plane returning to corporate headquarters. According to news reports, he had no knowledge whatsoever of this back-room dealing with the FDIC and of the imminent take-over.

I think it is unfair that J.P. Morgan Chase paid so little for Washington Mutual Bank. The shareholders and especially the bondholders got nothing. It took a lot of investment (debt, equity) to build the franchise and with a quick back-room deal with the FDIC, J.P. Morgan got the business for free. I can accept the equityholders of Washington Mututal Inc. who held the greatest risk, to be wiped out, but to let the bondholders (the creditors) be wiped out when the business was still intact and with hundreds of billions of dollars outstanding in assets is unfair. The creditors loaned the money to Washington Mutual. Without such a loan, Washington Mutual would have never been able to acquire the assets which J.P. Morgan Chase now owns. J.P. Morgan's payment for a net gain of $31 billion in assets: $1.9 billion.