JPMorgan takes calculated risk with WaMu takeover
The government's seizure and sale of Washington Mutual eases pressure on a federal fund that insures Americans' bank deposits and places...
The Associated Press
WASHINGTON — The government's seizure and sale of Washington Mutual eases pressure on a federal fund that insures Americans' bank deposits and places a high-stakes opportunity — with minimal risk — into the hands of JPMorgan Chase.
The CEO of WaMu is entitled to more than $13 million in severance and bonus pay. U.S. taxpayers, meantime, could end up shouldering billions of dollars worth of shaky mortgages and other investments that contributed to WaMu's demise. Such a scenario assumes the massive bailout proposed by Treasury Secretary Henry Paulson, or something like it, will be approved and JPMorgan will sell WaMu's least desirable assets to the government.
For its $1.9 billion investment, JPMorgan gets control of the nation's largest thrift — more than 5,000 branches in 23 states. It also assumes a highly stressed loan portfolio that could result in a $31 billion write down.
While JPMorgan would be in a position to limit such a hit by taking advantage of a Paulson-like bailout plan, analysts said the bank is strong enough — it had $98.7 billion in capital at the end of the second quarter — to shoulder the write down on its own.
"I don't think they need the government bailout to make WaMu work," said Len Blum, managing director of Westwood Capital. "They have the capital, they have the strength to hold those assets and take the write down. "
Blum expects the bank to benefit from the bailout in a more indirect way — as strong banks will prosper in a more stable market environment.
During a conference call with investors Thursday night, JPMorgan Chief Executive Jamie Dimon said the government's proposed bailout plan wasn't a factor in the acquisition.
Some experts said that's just not plausible.
Jim Wilcox, a finance professor at the University of California Berkeley's Haas School of Business, said he believes JPMorgan based its acquisition of WaMu on the assumption that a Paulson-like bailout plan would pass.
Bart Narter, senior vice president of banking at Boston-based research and consulting firm Celent, said JPMorgan made a calculated risk.
"They did a little decision tree on whether the bailout will happen and how bad the situation will get and the bargain they got on the branch network, and they figured they'd pay a risk-adjusted cost for the assets they're taking," including the branches and mortgage-backed securities, he said.
In a booming vote of confidence in JPMorgan's action, investors bought 246.9 million new shares today at $40.50 apiece, a 7 percent discount to Thursday's closing price of $43.46. JPMorgan raised gross proceeds of $10 billion from the offering, well above the $8 billion it had originally planned to raise.
Ultimately, though, JPMorgan has taken a gamble.
There is still a risk that the bank will be forced to write down more than $31 billion on the troubled assets it acquired, said Donn Vickrey, co-founder of Gradient Analytics. "But I just think it's a gamble worth taking and they have the capital to handle it if it does become worse," he said.
Washington Mutual's lucrative deposits outweigh any risk due to the write down, Vickrey said. And, in the end, if the bank actually ends up making a little money on the loans, that's just a bonus, he said.
For the Federal Deposit Insurance Co., the near-term financial threat posed by WaMu's failure drove the agency to expedite a seizure and sale.
"It was unique in its size and exposure to higher risk mortgages and the distressed housing market," Sheila Bair, the chairman of the FDIC, said in a conference call Thursday. "This is the big one that everybody was worried about."
FDIC's primary objective in organizing an auction that included JPMorgan and three other financial institutions was to dissolve WaMu without any cost to the deposit insurance fund, or taxpayers.
Before the deal with JPMorgan was brokered, there was concern on Wall Street that FDIC might have to tap the Treasury Department for a short-term loan.
The insurance fund, which depends on premiums paid by U.S. banks and thrifts, is currently at around $45.2 billion — below the minimum target level set by Congress. The fund took an $8.9 billion hit from the collapse of Pasadena, Calif.-based IndyMac, which had $32 billion in assets and some analysts had estimated that a failure of WaMu could cost the insurance fund tens of billions of dollars.
The size of the insurance fund is still a concern, however. Thirteen federally insured banks and thrifts have succumbed so far this year, and more are expected to fail as the mortgage crisis continues to reverberate across the industry.
Next month, Bair plans to propose increasing the premiums paid by banks and thrifts to replenish the fund.
JPMorgan's rescue of WaMu on Thursday was the second time in six months that it has taken over a major financial institution crippled by bad bets in the mortgage market. In March, it was Bear Stearns Cos. that was in trouble. JPMorgan paid $2.3 billion for the company and its stock — and the Federal Reserve helped grease the deal by providing a $29 billion loan.
A seizure of WaMu had been widely anticipated for some time because of the company's heavy mortgage-related losses. It has seen its stock price plummet 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday.
JPMorgan Chase said it plans to close less than 10 percent of the two companies' branches; the bank has not yet decided which to close.
WaMu CEO Alan Fishman signed an agreement when he joined the company earlier this month that provides around $6 million in cash severance and retention of his signing bonus of $7.5 million if he were to leave his job.
Copyright © 2008 The Seattle Times Company
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