Friday, September 26, 2008

WaMu's Bank Is Split From Holding Company, Sparing Deposit Fund

(Bloomberg) Washington Mutual Inc.'s holding company, detached from its branches and deposits when JPMorgan Chase & Co. bought the assets, helped the Federal Deposit Insurance Corp. dodge a bill for the lender's failure.

WaMu's collapse, the largest U.S. bank failure, came at a ``zero cost'' to the insurance fund for deposits, said FDIC Chairman Sheila Bair in an interview with Bloomberg Television. A ``clean, seamless transfer'' of the Seattle-based lender's banking unit helped shield the $45 billion fund, Bair said.

The FDIC's fund, drained by 12 other failures so far this year, was spared because WaMu's corporate structure let the agency seize only the bank. The holding company retained the liabilities, including senior and subordinated debt and equity.

``A wide swath of investors are going to be harmed by this, but the FDIC fund is going to come out of this unscathed,'' said Chip MacDonald, a partner in the capital markets group at Jones day in Atlanta. ``That's the happy part.''

The FDIC seized WaMu's banking units, ``cherry-picked a little bit'' and merged the Washington Mutual Federal Savings Bank into JPMorgan without transferring all the liabilities, MacDonald said. ``The FDIC has nothing to do with the holding company.''

Lawsuits against WaMu will remain at the FDIC, Standard & Poor's analyst Tanya Azarchs said in a statement.

Washington Mutual has been sued by investors who said the company committed securities fraud by over-inflating home appraisals while also inflating prices, according to a note from Sandler O'Neill & Partners LP analyst Jeffrey Harte.

`Unsound'

The lender was deemed ``unsound'' by the Office of Thrift Supervision after customers withdrew $16.7 billion in deposits since Sept. 15. WaMu, which had $188 billion in deposits and $307 billion in assets when it was seized, put itself up for sale last week after its credit rating was slashed to junk and its stock price tumbled.

Washington Mutual's holding company ``basically got cut loose,'' said Sterne Agee & Leach Inc. analyst Adam Barkstrom. ``The way WaMu and JPMorgan Chase worked, that's the way the system is supposed to work. The banks that made crappy loans and have crappy portfolios need to pay.''

The FDIC deposit insurance fund fell 14 percent to $45.2 billion in the quarter ended June 30, with the July 11 failure of IndyMac Bancorp Inc. costing about $8.9 billion, the agency said. An increase in insurance premiums paid by banks will be considered Oct. 7, Bair said this week.

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