Washington Mutual Inc (WM.N) was closed by the U.S. government in by far the largest failure of a U.S. bank, and its banking assets were sold to JPMorgan Chase & Co (JPM.N) for $1.9 billion.
The rescue marks a historic step to clean up a U.S. financial system littered with toxic mortgage debt.
Washington Mutual, the largest U.S. savings and loan, was closed by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. Customers should expect business as usual on Friday, the FDIC said.
The bailout came after the thrift suffered deposit outflows of $16.7 billion since September 15, the OTS said.
"With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business," the OTS said.
Seattle-based Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The nation's largest previous banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.
The transaction gives JPMorgan roughly 5,400 branches, and fulfills JPMorgan Chief Executive Jamie Dimon's long-held goal of becoming a retail bank force in the western United States.
It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price.
"Jamie Dimon is clearly feeling that he has an opportunity to grab market share, and get it at fire-sale prices," said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. "He's becoming an acquisition machine."
On a conference call, JPMorgan said the transaction will add to earnings immediately, and result in $1.5 billion of annual cost savings, including from the closure of less than 10 percent of the combined company's branches. He also said JPMorgan plans to issue $8 billion of stock.
The acquisition does not cover Washington Mutual's equity, senior debt and subordinated debt holders, the FDIC. The FDIC said the transaction will not affect its roughly $45.2 billion deposit insurance fund.
The transaction also comes as Washington wrangles over the fate of a $700 billion bailout of the financial services industry, which has been battered by mortgage defaults and tight credit conditions, and evaporating investor confidence.
"It removes an uncertainty from the market," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "The problem is that markets are in a jittery stage. Washington Mutual provides another reminder how tenuous things are."
Washington Mutual's collapse is the latest of a series of takeovers and outright failures that have transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.
These include the disappearance of Bear, government takeovers of mortgage companies Fannie Mae (FNM.P) and Freddie Mac (FRE.P) and the insurer American International Group Inc (AIG.N), the bankruptcy filing of Lehman Brothers Holdings Inc (
JPMorgan, based in New York, ended June with $1.78 trillion of assets, $722.9 billion of deposits and 3,157 branches. Washington Mutual had 2,239 branches and 43,198 employees.
Shares of Washington Mutual plunged $1.24 to 45 cents in after-hours trading after news of a JPMorgan transaction surfaced. JPMorgan shares rose $1.04 to $44.50 after hours.
The transaction ends exactly 119 years of independence for Washington Mutual, whose predecessor was incorporated on September 25, 1889, "to offer its stockholders a safe and profitable vehicle for investing and lending," according to the thrift's website. This helped Seattle residents rebuild after a fire torched the city's downtown.
It also follows more than a week of sale talks in which Washington Mutual attracted interest from several suitors.
These included Banco Santander SA (
Less than three weeks ago, Washington Mutual ousted Chief Executive Kerry Killinger, who drove the thrift's growth as well as its expansion in subprime and other risky mortgages, and replaced him with Alan Fishman, the former chief executive of Brooklyn, New York's Independence Community Bank Corp.
The transaction also appears to be a costly defeat for David Bonderman and his private equity firm TPG Inc (TPG.UL), the lead investor in a $7 billion capital raise by the thrift in April. TPG was unavailable for comment.
Washington Mutual's roughly $227 billion book of real estate loans put the thrift at the top of the critical list of U.S. lenders, analysts said. More than half of this portfolio was in home equity loans and in adjustable-rate mortgages and subprime mortgages that are now considered risky.
Thursday's transaction makes JPMorgan close in size to Citigroup, now the largest U.S. bank by assets.
JPMorgan has surpassed Bank of America in size. That bank would become the largest U.S. bank once it completes its planned purchase of Merrill Lynch, expected in the first quarter of 2009.
The deal is the latest ambitious move by Dimon.
Once a golden child at Citigroup before his mentor Sanford "Sandy" Weill engineered his ouster in 1998, Dimon has carved for himself something of a role as a Wall Street savior.
Dimon joined JPMorgan in 2004 after selling his Bank One Corp to the bank for $56.9 billion, and became chief executive at the end of 2005. While results have been hurt by the credit crisis, JPMorgan has suffered less than many rivals.
Some historians see parallels between him and the legendary financier John Pierpont Morgan, who ran J.P. Morgan & Co and was credited with intervening to end a banking panic in 1907.
Bank of America Chief Executive Kenneth Lewis has also been credited with helping reduce damage on Wall Street with his acquisitions this year of Merrill Lynch and Countrywide Financial Corp, the nation's largest mortgage lender.
Washington Mutual has a major presence in California and Florida, two of the states hardest hit by the housing crisis. It also has a big presence in the New York City area.
The thrift amassed $6.3 billion of losses in the nine months ended June 30. It had also projected $19 billion of mortgage losses through 2011, but analysts said credit losses could reach as high as $30 billion.
"It is surprising that it has hung on for as long as it has," said Nancy Bush, an analyst at NAB Research LLC.
(Additional reporting by Paritosh Bansal, Christian Plumb and Dan Wilchins; Jessica Hall in Philadelphia; John Poirier in Washington, D.C. and Kevin Lim in Singapore; Editing by Gary Hill)
A deal to rescue the faltering U.S. financial system stalled on Thursday amid bickering between Democrats and Republicans and accusations of political posturing by Republican presidential candidate John McCain.
U.S. lawmakers had appeared close to a final agreement on Thursday on a massive $700 billion bailout to save the financial system, lifting world stock markets and sending the dollar higher. But things spun off course during an emergency White House meeting between Congressional leaders with U.S. President George W. Bush, according to lawmakers.
In advance of that meeting, which included the two men battling to succeed him, Democrat Barack Obama and McCain, a compromise bipartisan deal seemed imminent.
After the session, Congressional leaders said an agreement could take until the weekend, sending U.S. stock futures down, paring earlier gains.
Republican U.S. Sen. Richard Shelby bluntly told reporters, "I don't believe we have an agreement.
A group of conservative Republican lawmakers proposed an alternative mortgage insurance plan, eschewing the Bush administration's Wall Street bailout just weeks before the November 4 election as many lawmakers try to hold on to their seats.
Congressional aides said they were still working on reaching a deal, with many issues remaining.
White House spokeswoman Dana Perino said, "The deal is not finalized ... There's a commitment to get something done, nobody's happy about it."
U.S. Senate Banking Committee Chairman Christopher Dodd said a deal could take beyond Friday to reach and took a firm swipe at McCain, who returned from his presidential campaign to try to broker a deal.
"What this looked like to me was a rescue plan for John McCain for two hours," Dodd told CNN. "To be distracted for two to three hours for political theater doesn't help."
Also speaking to CNN, Obama said, "Sen. McCain spoke briefly. I think he still wants to see something happen."
"The concern that I have ... is that when you start injecting presidential politics into delicate negotiations then you can actually create more problems rather than less."
Earlier, news that a deal was near stabilized beleaguered money markets, frozen by a reluctance by banks to lend. The rate on one-month U.S. Treasury bills shot higher as traders unwound safe-haven trades.
Still, officials from France to China voiced alarm.
"A crisis of confidence without precedent is shaking the global economy," French President Nicolas Sarkozy said in a speech in Toulon, France.
As Thursday's meeting began, Bush warned, "We're in a serious economic crisis in the country if we don't pass a piece of legislation."
U.S. Rep. Barney Frank, the powerful Democratic chairman of the House Financial Services Committee, said before the Bush meeting that the deal would give the money to the U.S. Treasury in installments rather than a $700 billion lump sum the Bush administration wanted.
The enormity of the deal, which would cost every man, woman and child in the United States about $2,300, led many lawmakers to ask U.S. Treasury Secretary Henry Paulson during two days of rancorous hearings this week to take the cash in installments.
The bailout exceeds total lending by the International Monetary Fund since its inception after World War II. The IMF has loaned $506.7 billion since 1947 to countries in crisis as far flung as Argentina, Britain, Turkey and South Korea.
Frank also said the deal would allow the government to take part-ownership of banks, ban companies who sell toxic assets to the government from paying massive "golden parachutes" to executives being fired and include measures to help some Americans avoid losing their homes.
Reflecting that the current crisis appears to be the most serious since the Great Depression of the 1930s, fresh Federal Reserve data showed U.S. banks and money managers have borrowed a record $188 billion daily in recent days from the Fed -- a daily amount roughly equal to Argentina's annual economic output.
"This looks like the balance sheet of a central bank that is keeping the financial system on life support," said Michael Feroli, U.S. economist with JPMorgan in New York.
The swirl of political theater and meetings in Washington followed fresh turbulence in the world economy.
Orders for costly U.S. manufactured goods plunged in August, new-home sales hit a 17-year low, while new claims for jobless benefits shot up last week.
Top U.S. industrial conglomerate General Electric Co (GE.N), widely seen as a bellwether of the U.S. economy, issued a profit warning, citing "unprecedented weakness and volatility" in the financial services market.
In the latest shake-up on Wall Street, JPMorgan Chase & Co (JPM.N) plans to acquire the deposits of beleaguered savings and loan Washington Mutual Inc (WM.N), the Wall Street Journal reported.
The crisis reverberated in Amsterdam and Brussels, where Fortis NV (
In Asia, hundreds of people lined up outside the Hong Kong branches of the Bank of East Asia Ltd (
China's banking regulator sought to reassure jittery financial markets, denying a report that it had told local banks to stop lending to U.S. banks.
INTENSE BAILOUT TALKS
Earlier, expectations of a deal to stave off a widespread financial meltdown gave beleaguered U.S. stocks and the U.S. dollar a boost.
The crisis comes after a month of turbulence marked by the government's takeover of mortgage companies Fannie Mae (FNM.P)
and Freddie Mac (FRE.P), the bailout of insurer American International Group Inc (AIG.N), and the bankruptcy filing of investment bank Lehman Brothers Holdings Inc (
But just weeks before Americans go to the polls to elect a new president, critics are concerned the plan will let freewheeling bankers off too lightly, and doubts have surfaced over whether it can solve the wider crisis.
Concern lingered that even with a bailout, the United States may stumble, prompting a global slowdown.
German Finance Minister Peer Steinbrueck said one outcome of the crisis would be a less dominant role for the United States in the global financial system.
"The United States will lose its superpower status in the world financial system. The world financial system will become more multipolar," he said.
(Writing by Mark Egan; Reporting by Richard Cowan, Alister Bull, David Lawder, Kevin Drawbaugh, Glenn Somerville, Noah Barkin, Richard Leong, Megan Davies, John Parry, Jessica Hall and Ellis Mnyandu; editing by John Wallace and Jeffrey Benkoe)
Research In Motion (
In addition to a light earnings-per-share outlook, the company revealed a gross-margin forecast that was softer than many had anticipated. RIM blamed increased expenses related to its latest handsets like the BlackBerry Bold, a high-end model targeting the company's mainstay base of corporate users.
"This is a surprise, and not a positive one," Canaccord Adams analyst Peter Misek said of the results. "For next quarter, gross margin ... is way lower than we thought."
The disappointing news came as Waterloo, Ontario-based RIM reported a profit in its second quarter that was in line with forecasts. The company also said its enterprise business, mainly corporate customers, was still robust, even as economic uncertainty prevails in the U.S. market.
Even so, RIM's shares sold off immediately after it released its results, dropping to $79.10 in after-hours trade, down 19 percent from their close at $97.53 on Nasdaq. Shares of competitor Apple Inc (AAPL.O) closed up 2.5 percent at $131.93 on Nasdaq, but also fell after the bell to $127.10.
For the three months ended August 30, RIM's earnings rose to $495.5 million, or 86 cents a share, from $287.7 million, or 50 cents, in the same period a year earlier.
The results were in line with the company's June forecast and just shy of analyst expectations for a profit of 87 cents a share, according to Reuters Estimates.
RIM co-CEO Jim Balsillie told analysts in a conference call that the company's newest, feature-rich handsets have higher costs associated with them, which in turn affects margins.
"This is particularly the case with (BlackBerry) Bold and other unannounced 3G product platforms," he said.
It's also difficult for RIM to pass on all those higher costs to consumers and still keep next-generation BlackBerry prices at attractive levels, Balsillie added.
RIM has recently announced BlackBerry models aimed at the broader consumer market, including a flip-phone BlackBerry Pearl. It is also preparing to launch a touch-screen version of its smartphone to compete more directly with Apple's iPhone.
U.S. DOWNTURN LOOMS
Analysts and investors have long held concerns that some of RIM's large corporate clients could scale back BlackBerry purchases and upgrades as the economic downturn takes hold, hurting the company's performance. The recent turbulence on Wall Street has underscored those concerns.
Balsillie has said that he sees a limited impact at most because the U.S. financial-services industry, which has been rocked by the downturn, makes up only a small part of RIM's subscriber base.
On Thursday, he said corporate clients were still buying BlackBerrys and that the enterprise business "remains strong."
For its third quarter, RIM expects earnings per share of between 89 and 97 cents -- less than analyst expectations, according to Reuters Estimates. It also expects to add 2.9 million subscribers and to have a gross margin of 47 percent.
RIM said its revenue was $2.58 billion, up 88 percent from $1.37 billion a year earlier. Analysts had forecast $2.59 billion. For the third quarter, it said it expects revenue of between $2.95 billion and $3.1 billion.
The company said it added 2.6 million subscribers and that its total base is now about 19 million.
(Reporting by Wojtek Dabrowski; editing by Frank McGurty)