The Inside Story of the World's Largest Bank Failure
Washington Mutual was a traditional savings and loan institution. It was the largest bank to fail in the United States' history when it collapsed in 2008. WaMu had over 43,000 employees, 2,200 branch locations in 15 states, and $188.3 billion in deposits at the end of 2007. Individuals and small businesses were the majority of its clients. Retail banking accounted for nearly 60% of its revenue, with credit cards accounting for another 21%. Home loans only accounted for 14% of the company's revenue, but that was enough to bankrupt the remainder of the business. Insolvency occurred by the end of 2008.Why Did WaMu Fail?
There were five reasons why Washington Mutual failed. For starters, it was extremely successful in California. There was a worsening in the housing market there than in other parts of the country. Home values began to decline across the country in 2006. The trend has slowed after reaching a high of nearly 14% year-over-year growth in 2004. The national average home value had dropped 6.5 percent from its 2006 high by December 2007. Housing costs had not dropped in decades. There was about ten months' worth of housing inventory nationwide. California had unsold inventory for more than 15 months. Normally, the state has enough inventory to last six months. Many loans were over 100% of the home's value by the end of 2007. WaMu had made an effort to be cautious. It only issued mortgages with a loan-to-value ratio of more than 80% on 20% of its loans. It didn't matter, though, when housing prices fell. The second reason for WaMu's demise was its hasty branch expansion. As a result, it was in too many markets in bad locations. As a result, it issued an excessive number of subprime loans to unqualified borrowers. The third was the collapse of the mortgage-backed securities secondary market in August 2007. WaMu was unable to resell these mortgages, as were many other banks. Because of the falling home prices, they were overpaying for the houses. The bank was unable to raise funds due to a lack of liquidity. It wrote $1.6 billion in defaulted mortgages off in the fourth quarter of 2007. It was required by bank regulation to set aside funds to cover potential losses in the future. WaMu's net loss for the quarter was $1.9 billion as a result of this. The company made a $67 million net loss for the year. That's down from a $3.6 billion profit in 2006. The bankruptcy of Lehman Brothers on September 15, 2008, was a fourth. The news sent WaMu depositors into a panic. Over the next ten days, they took out $16.7 billion from their savings and checking accounts. It accounted for more than 11% of WaMu's total assets. According to the Federal Deposit Insurance Corporation, the bank lacked the necessary funds to conduct daily operations. The government began looking for potential buyers. The bankruptcy of WaMu is better understood when viewed in the context of the 2008 financial crisis. The moderate size of WaMu was the fifth factor. It wasn't too big to fail, but it wasn't too small to succeed. As a result, unlike Bear Stearns and American International Group, the US Treasury and Federal Reserve would not bail it out.What Happened to Washington Mutual?
The FDIC took over the bank on September 25, 2008, and sold it to JPMorgan Chase for $1.9 billion. The bank's holding company, Washington Mutual Inc., declared bankruptcy the next day. After Lehman Brothers, it was the second-largest bankruptcy in history. JPMorgan Chase appears to have gotten a good deal on the surface. It only paid $1.9 billion for assets worth around $300 billion. On the other hand, Chase had to write down $31 billion in bad loans. To keep the bank afloat, it needed to raise $8 billion in new capital. WaMu was the only bank that made a bid. It was rejected by Citigroup, Wells Fargo, and even Banco Santander South America. On the other hand, WaMu's 2,239 branches and strong deposit base were attractive to Chase. It now has a presence in California and Florida as a result of the acquisition. In March 2008, it even made an offer to buy the bank. WaMu instead chose a $7 billion investment from Texas Pacific Group, a private equity firm.Who Was Affected by the Losses?
The most significant losses were paid by bondholders, shareholders, and bank investors. WaMu bondholders lost about $30 billion on their investments. Except for 5 cents per share, most shareholders lost everything. Others had everything taken away from them. TPG Capital, for example, lost all of its $1.35 billion investment. JPMorgan Chase was sued by the WaMu holding company for access to $4 billion in deposits. WaMu was sued by Deutsche Bank for $10 billion in claims related to failed mortgage securities. It stated that WaMu was aware of their deception and should buy them back. It was unclear whether the FDIC or JPMorgan Chase was responsible for any of these allegations.