WaMu failure: Largest bank collapse in U.S. history

In the largest bank failure in U.S. history, Washington Mutual Inc. (WaMu), with $307 billion in assets, was seized by federal regulators; and its asset was swiftly acquired by J.P. Morgan Chase for $1.9 billion Thursday.

The federal Office of Thrift Supervision said it closed WaMu on Thursday and appointed the Federal Deposit Insurance Corp. as receiver. The FDIC in turn conducted the bidding process that led to the purchase by J.P. Morgan.

J.P. Morgan purchase included all of WaMu's deposits, assets and some liabilities. All deposit accounts with Washington Mutual Bank have been transferred to J.P. Morgan Chase Bank. Those deposit accounts include checking, savings, money market, CDs and retirement accounts. J.P. Morgan purchase excluded senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks. J.P. Morgan said it would not be acquiring any assets or liabilities of the bank's holding company.

After the purchases of WaMu and the investment bank Bear Stearns Cos. in March, JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch.

WaMu is expected to declare bankruptcy as soon as Friday, putting stock holders at the end of a long line of claimants and leaving them empty handed.

On Wednesday, a Standard & Poor's ratings downgrade further pushed the bank toward collapse. Its stock price had plummeted some 95% to its close of $1.69 a share Thursday.

Seattle-based WaMu, which was founded in 1889, is the largest bank failure in U.S. history with $307 billion in assets. The magnitude surpasses the $40 billion of Continental Illinois National Bank & Trust, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July 2008.

WaMu, long one of the nation's largest mortgage lenders, was hit hard by the subprime crisis that has widened to threaten U.S. financial markets and led to the current financial crisis.

WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage (Option ARM) loans. Option ARM loans were offered to borrowers for very low introductory payments. Those loans often included the option to defer some interest payments until later years or to pay only interest, which caused the borrowers debt to grow with each payment, becoming negative amortization loans.

When housing prices began to fall just at the time rates were adjusting higher on those loans, borrowers began defaulting at alarming rates, leading to big losses for WaMu and others who had extended the credit or purchased securities based on the credits. The bank stopped originating those loans in June.