October 01, 2008
JPMorgan Acquires WaMu; Citigroup Buys Wachovia
Last week, the Federal Deposit Insurance Corp. took control of Washington Mutual Inc., and then sold its banking assets to JPMorgan Chase & Co. for $1.9 billion. Meanwhile, Citigroup announced that it will acquire Wachovia’s banking operations for $2.2 billion, which will give it about a 9.8 percent the U.S. market and broaden its presence in the Southeast and the West.
With $307 billion in assets, Seattle-based WaMu is the largest bank to fail in the country's history. The thrift became heavily involved with subprime mortgages, the problems of which spread to other parts of its home loan portfolio, mainly its adjustable-rate mortgage loan area. As the delinquency rate on mortgages continued to increase, WaMu committed $2 billion to help troubled homeowners by refinancing loans in order to avoid default and foreclosure. However, the move may have come too late.
FDIC Chairman Sheila Bair stated. "For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks. For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual."
As a result of the acquisition, JPMorgan Chase will have 5,400 branches in 23 states. "This is a definite win for JPMorgan," said SNL Financial Analyst Sebastian Hindman. The purchase of WaMu is JPMorgan Chase's second acquisition this year of a major financial institution. In March, JPMorgan bought Bear Stearns Cos. as it faced enormous debt resulting from the mortgage crisis. JPMorgan Chase is now the second-largest bank in the country after Bank of America Corp.
Meanwhile, as part of its all-stock agreement, Citigroup will assume about $53 billion in Wachovia's debt and absorb about $42 billion of its losses, with the FDIC covering the remaining losses. In return, Citigroup will issue $12 billion in preferred stock and warrants to the FDIC.
Trouble at Wachovia can be traced to its 2006 acquisition of Golden West Financial, in which the financial institution inherited a deteriorating $122 billion loan portfolio. Federal officials speculated that if a deal for Wachovia had not been reached, it could have resulted in further turmoil for the economy. "A failure of Wachovia would have posed a systemic risk," Treasury Secretary Henry Paulson said in a statement.
Banking regulators stressed that Wachovia customers would not experience any interruption in service and that their deposits remained protected. Wachovia remained a publicly traded company following Monday's deal, with the Charlotte, N.C.-based firm continuing with its brokerage operations as well as its investment management division.