JPMorgan and WaMu: Was It a Good Deal?

As we continue our retrospective of the past year's massive financial meltdown, we must note that it was a year ago today that JPMorgan Chase (NYSE: JPM  ) bought Washington Mutual. With $307 billion in assets, WaMu was (and still is, at least so far) the largest bank failure in history by far.

My favorite part: Just five months before the deal went down, JPMorgan offered to buy WaMu for $8 a share, or about $8 billion. WaMu refused, opting to raise capital and go it alone. No one knows for sure, but plenty speculated that WaMu walked away because then-CEO Kerry Killinger couldn't face the thought of being unemployed.

Fast-forward to last fall, and Killinger was not only canned, but became the poster child for moral hazard, while JPMorgan was able to buy WaMu from the FDIC for a mere $1.9 billion. It's one more example of greed, irony, and stupidity at their finest.

One sweet deal
The most important thing about this deal is that because WaMu failed and was seized by the FDIC, JPMorgan didn't have to buy the entire company -- just the parts it wanted. All it bought were WaMu's banking assets and deposit base, while most of its debt and preferred securities were, as my Foolish colleague Chuck Saletta put it, "left to rot in bankruptcy court."

That dramatically reduced the potential risk JPMorgan assumed, and makes the deal much different from Bank of America's (NYSE: BAC  ) acquisitions of Countrywide and Merrill Lynch, Wells Fargo's (NYSE: WFC  ) buyout of Wachovia, and even JPMorgan's own purchase of Bear Stearns.

With the biggest risks hacked away, JPMorgan's upsides are WaMu's deposit base and geographic presence. JPMorgan's commercial banking segment, Chase, gained roughly $188 billion in deposits after the deal, and got entry into new territories in the West and Southeast. In California, Chase went from three branches before the acquisition to 691 after. Similarly, its branch count rose from 13 to 274 in Florida and from 1 to 188 in WaMu's home state of Washington.

Chase cheaply and efficiently expanded its footprint into areas it was previously nearly excluded from, giving it a leg-up on not just big competitors, but regional niche banks like SunTrust (NYSE: STI  ) and Fifth Third (Nasdaq: FITB  ) . The new deposits also cemented JPMorgan's source of stable, cheap capital at a time when investment banks like Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) could only dream of the stuff.

No doubt about it: Gaining deposits and geographic turf, combined with the debtless way the deal was structured, made the acquisition a near no-brainer.

Now the bad news
Less exciting for shareholders is what to make of the $176 billion in mortgage assets that JPMorgan inherited. When the deal was first struck, JPMorgan said it would be writing down the value of WaMu's mortgage book by $31 billion, or more than 17%, to counteract what it thought were probable losses.

Seventeen percent, of course, is a massive haircut in an industry that survives on margins in the low single digits, so the writedown was seen by most as more than adequate.

But a lot has changed since then, and none of it for the better. JPMorgan's original loss estimates rested on assumptions that now look terribly optimistic. Although the company based its loss estimates on the assumption that home prices nationwide would fall only another 8% after September 2008, the S&P Case-Shiller National Home Price Index has plunged around 12%, and despite recent monthly price gains, any sensible estimate will tell you the bottom hasn't been hit.

JPMorgan also expected unemployment to top out at 7%, yet it's now pushing the 10% mark. Both statistics are hugely important to WaMu's loan book, which was stuffed full of option ARM loans set to recast, which in turn would result in ballooning monthly payments for homeowners who either can't or choose not to stay in the game.

All of this means that JPMorgan won't see the kind of profit it originally expected from the deal. WaMu's book, like many others', is a total mess and is bound to deteriorate for a good while longer, eating into potential earnings and chipping away at capital.

Moving on
Bottom line: Was WaMu a good deal for JPMorgan Chase? Like nearly every deal struck last fall, it hasn't turned out nearly as well as expected. In fact, you could argue WaMu's assets were among the worst in the nation. But the way JPMorgan structured the deal -- bought for practically nothing, only acquiring assets and deposits -- set it apart from the other chaotic deals we saw during the crisis.

So while the deal hasn't been great, it hasn't been terrible, either. And in this economy, that's all it takes to stay on top.

What's your assessment? Scroll down and let me know in the comments box.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (9)

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  • Report this Comment On September 25, 2009, at 3:48 PM, corrector wrote:

    jpm wrote down 31 bio? in their sec filling there was 30 bio. and they wrote up 29 bio. so we have left 1 bio, not bad for wamu, in the lowest one digits.

    you made a nice piece of halftruth, and propaganda for jpm. how many did jpm pay for it?

  • Report this Comment On September 25, 2009, at 4:35 PM, MomFool51 wrote:

    well, purely from the perspective as a customer in California, I have been very pleased with the change.

  • Report this Comment On September 25, 2009, at 4:50 PM, pacblues wrote:

    "you could argue WaMu's assets were among the worst in the nation"

    --- how can you make such an unsubstantiated statement? i know former wamu people working at other banks now and they are amazed that the standards are much worse at the other banks than at wamu. wamu's standards for much of it's portfolio were good. wamu just extended too much into riskier categories: subprime, helocs and was too concentrated in california. your blanket statement about wamu being the worst in the nation is stupid and just too easy for idiots to make since wamu can no longer defend itself.

  • Report this Comment On September 25, 2009, at 4:51 PM, questioner5000 wrote:

    BAC should have done the same thing with both Countrywide and Merrill Lynch, and Wells Fargo should have done the same thing with Wachovia. Let the FDIC deal with the junk, and purchase only the little pieces that had ongoing value! Then those two banks would also be regarded as "well managed", certainly in better shape than they are now, would be out of TARP, and everyone, (especially BAC and WFC shareholders), would be much happier ...

    ... except for the fact that the entire U.S. financial system would have imploded, and we'd now be in a depression.

  • Report this Comment On September 25, 2009, at 5:07 PM, TMFHousel wrote:

    "i know former wamu people working at other banks now and they are amazed that the standards are much worse at the other banks than at wamu."

    Fair enough. And if true, those banks will probably fail, too.

    "wamu's standards for much of it's portfolio were good. wamu just extended too much into riskier categories: subprime, helocs and was too concentrated in california."

    In other words, it's risk standards weren't good, right?

    "your blanket statement about wamu being the worst in the nation is stupid and just too easy for idiots to make since wamu can no longer defend itself."

    Easy there. That JPM had to hack down its loan book by 17% should be enough evidence, but here's more: JPM estimates WaMu's credit card default rate will hit 18%-24% by the end of this year. That's over double the national average, and waaaay higher than any other major bank.

  • Report this Comment On September 25, 2009, at 5:39 PM, corrector wrote:

    TMFhousel: you know this bloomberg message?

    "On May 26, 2009, Bloomberg reported the following on the reported $30 billion in losses: "JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income." In other words, all but $1 billion of the $30 billion write down losses will be negated by the subsequent $29 billion write up.""

    You didn`t? Louzy work, boy. start again and without jpms money.

  • Report this Comment On September 25, 2009, at 5:44 PM, corrector wrote:

    TMFHousel: another article:

    "In JPMorgan’s case, the firm took on $118.2 billion in toxic debt when it acquired Washington Mutual Inc. last year. As a receiver of that debt, JPMorgan was allowed to mark that debt down to “fair value,” or $88.65 billion. But now, the bank says that those same debts may appreciate by some $29.1 billion over the life of the loans. And as those loans are paid back, that money is booked as profit."

    http://www.moneymorning.com/2009/07/17/jpmorgan-chase-accoun...

    why don't you apologize for your bad work?

  • Report this Comment On September 25, 2009, at 5:46 PM, TMFHousel wrote:
  • Report this Comment On September 25, 2009, at 5:46 PM, HROLLER30 wrote:

    Wamu TRUTH...

    READ THESE COURT DOCUMENTS!

    JPMorgan admits that the FDIC took over a solvent bank in one of the latest court documents...

    I'm enclosing a few more documents filed through the BK court in regards to a declaration of Thomas M. Blake (http://www.crai.com/ProfessionalStaff/listingdetails.aspx?id... ).

    The declaration can be found in 103-4.pdf at http://www.mediafire.com/?sharekey=3b830df9f3d0e6fce7c82ed4b...

    Quoting:

    12. Based on my review to date, there is no indication that the OTS performed a solvency analysis consistent with the test for insolvency specified in the Bankruptcy Code. There is no indication that the OTS assessed the fair sale-able value of the assets of WMB (or WMI). Nor is there an indication that OTS compared the fair sale-able value of the assets of WMB (or WMI) to the total amount of either company’s respective liabilities. There is no indication that the OTS performed a comprehensive cash flow analysis of WMB (or WMI). Instead, the OTS found that “WMB met the well-capitalized standards through the date of receivership.”8 Thus, without a thorough analysis of the assets, liabilities and capital of WMI and WMB, it is not possible to come to a reliable conclusion concerning the financial solvency of either entity, whether on a consolidated or stand-alone basis.

    Here is another document that says as of August 14, 2008:

    "We propose to decapitalize WMBfsb by returning $20 billion of capital to its parent. The $20 billion will include the master note of approximately $7 billion, proceeds from $3.5 billion of Discount Notes and cash generated through additional wholesale deposits and advances from FHLB Seattle. We propose the payment of at least $10 billion by September 30, 2008 and the remaining $10 billion through December 2009."

    "The net balance sheet of WMBfsb will be approximately $34 billion to $36 billion after Project Fillmore. The leverage ratio will decrease to 25% from 62%. A well-capitalized institution requires an 8% or higher leverage ratio."

    Read reference page 45 of DOCUMENT 103-1.pdf from here:

    http://www.mediafire.com/?sharekey=3b830df9f3d0e6fce7c82ed4b...

    Enclosed is a link to the affidavit of Doreen Logan who is the Controller/ Assistant Treasurer of Wamu who states that there was no liquidity problems;

    http://www.google.com/search?hl=en&ie=ISO-8859-1&q=%...

    Remember, WMBfsb was also taken from the holding company and sold to JMorgan/Chase with all of the other assets for only $1.88bil.....

    Please, take some time and read these documents. They are a bit long but well worth the read. Don't you wonder why the main stream media doesn't mention the suppose "failure" of the largest financial institution in America? Wamu was a 100+ year old company.....Here is a link to all documents filed through the BK Court;

    http://www.kccllc.net/wamu

    Jamie Dimon planted "moles" in Wamu??? JPMorgan committed corporate fraud???

    http://www.kccllc.net/documents/0812229/08122290905010000000...

    Wamu's claims against JPMorgan/Chase;

    http://wmish.com/doc/gov/0603/JPM_V_WMI_-_ANSWER.PDF

    I'm also enclosing another link that quotes Judge Hughes from a case against the FDIC that was wrapped up on August 24, 2005; http://blog.kir.com/archives/2005/08/judge_hughes_ha.asp

    "The record shows that the swap was the only reason for this suit. It also shows that the FDIC knew that it had no factual or legal basis for its claims, and that its cases here and in Washington were shams."

    As usual, Judge Hughes is acerbic in his opinion regarding the FDIC's conduct, noting in particular that FDIC officials "lied about it all under oath" and they "discarded the mantle of the American Republic for the cloak of a secret society of extortionists."

    "It's hard to find a word that captures the essence of the FDIC's bringing this action. Irresponsible is close. Arbitrary, dishonest, exploitative, extortionate, and abusive all fit."

    Judge Hughes concluded that Hurwitz and Maxxam "will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation."

    http://wamustory.com/

    http://wamuqd.com/

    http://www.wamu-shareholders-resources.com/wamued.html

    http://wamuequity.org/history.html

    http://www.wamucoup.com/

  • Report this Comment On September 25, 2009, at 5:48 PM, HROLLER30 wrote:

    Wamu TRUTH...

    READ THESE COURT DOCUMENTS!

    JPMorgan admits that the FDIC took over a solvent bank in one of the latest court documents...

    I'm enclosing a few more documents filed through the BK court in regards to a declaration of Thomas M. Blake (http://www.crai.com/ProfessionalStaff/listingdetails.aspx?id... ).

    The declaration can be found in 103-4.pdf at http://www.mediafire.com/?sharekey=3b830df9f3d0e6fce7c82ed4b...

    Quoting:

    12. Based on my review to date, there is no indication that the OTS performed a solvency analysis consistent with the test for insolvency specified in the Bankruptcy Code. There is no indication that the OTS assessed the fair sale-able value of the assets of WMB (or WMI). Nor is there an indication that OTS compared the fair sale-able value of the assets of WMB (or WMI) to the total amount of either company’s respective liabilities. There is no indication that the OTS performed a comprehensive cash flow analysis of WMB (or WMI). Instead, the OTS found that “WMB met the well-capitalized standards through the date of receivership.”8 Thus, without a thorough analysis of the assets, liabilities and capital of WMI and WMB, it is not possible to come to a reliable conclusion concerning the financial solvency of either entity, whether on a consolidated or stand-alone basis.

    Here is another document that says as of August 14, 2008:

    "We propose to decapitalize WMBfsb by returning $20 billion of capital to its parent. The $20 billion will include the master note of approximately $7 billion, proceeds from $3.5 billion of Discount Notes and cash generated through additional wholesale deposits and advances from FHLB Seattle. We propose the payment of at least $10 billion by September 30, 2008 and the remaining $10 billion through December 2009."

    "The net balance sheet of WMBfsb will be approximately $34 billion to $36 billion after Project Fillmore. The leverage ratio will decrease to 25% from 62%. A well-capitalized institution requires an 8% or higher leverage ratio."

    Read reference page 45 of DOCUMENT 103-1.pdf from here:

    http://www.mediafire.com/?sharekey=3b830df9f3d0e6fce7c82ed4b...

    Enclosed is a link to the affidavit of Doreen Logan who is the Controller/ Assistant Treasurer of Wamu who states that there was no liquidity problems;

    http://www.google.com/search?hl=en&ie=ISO-8859-1&q=%...

    Remember, WMBfsb was also taken from the holding company and sold to JMorgan/Chase with all of the other assets for only $1.88bil.....

  • Report this Comment On September 25, 2009, at 6:00 PM, TMFHousel wrote:

    Corrector,

    The $29 billion potential writeup is *over the life of the loan,* many of which go out several decades. It isn't a one-time gain.

    More importantly, it happens only *if* borrowers the bank currently deems as probable defaults are eventually able to repay their loans. That isn't happening. Not even close. Many of these borrowers just walked away. I do, therefore, agree with the credit analyst in the Bloomberg article who notes "If I were them, I wouldn’t be claiming any victory yet.”

  • Report this Comment On September 25, 2009, at 8:04 PM, 7footmoose wrote:

    do not for one second underestimate the ability of Jamie Dimon's team to strike a very favorable deal, there are few, very few, better players in this business

  • Report this Comment On September 26, 2009, at 12:25 AM, ll00 wrote:

    i think that jp actually bribe someone to force wamu into its hand. The selling price was ridiculous, and i did end up losing quite a lot of money on that one. I also think it is ridiculous that jp took over wamu 2 day or a day before congress could even vote on the 700 billion bail out ( the first time). They did not even allow any chance where wamu can survive. Cut throat policy, and i am willing to bet there are someone got bribe.

  • Report this Comment On September 27, 2009, at 2:40 PM, HDTVBG wrote:

    JPMorgan is CHASE-ING away civilian WAMU customers and trying to capture commercial banking business on the west coast. CHASE dropped its civilian interest rates across the board to nearly zero, 0.01% and folks like me have drained our accounts and re-distributed at banks paying between 0.6% to 1.75% on checking and money market savings. Meanwhile CHASE has a pretty series of hypnotic television advertisements enticing commercial business. The message is clear, thanks for the fish FDIC, any civilian deposits that stay with us out of ignorance or momentum are yummy free assets that we will leverage by dinging the civilian accounts with a host of new fees. Starting at the end of October CHASE will re-align all WAMU accounts into new CHASE tiers, cynically assigning old WAMU tiered deposit accounts into CHASE tiers requiring higher balances than are currently present in order to create monthly fee revenue of $20 - $25 per month per account. Quite a windfall until folks wise up and demand to be switched into lower tiers or close the accounts. This is RICO scale FRAUD!

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