JP Morgan Will Now Be the Third Largest Bank in the United States After the Completion of This Deal

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Thursday was another historic day as the largest ever U.S. bank failure took place. Washington Mutual, an enormous bank with approximately $310 billion dollars in assets, was officially seized by the Federal Deposit Insurance Corp. after the close of trading on Thursday. To give you some perspective, the largest previous failure was Continental Illinois National Bank which failed in 1984. At the time of their failure, Continental Illinois had approximately $40 billion dollars in assets. IndyMac, which was seized earlier this year, has approximately $32 billion dollars in assets at the time of its failure.

While it may seem as though JP Morgan snapped up the assets at lightning speed (after all, the FDIC seized Washington Mutual today and a deal with JP Morgan was announced just a few hours later), companies were poring over WaMu's books over the past few weeks. Everyone was aware that the bank was on the brink of failure, and a number of companies were given opportunities to examine the books and submit bids. In the end, JP Morgan won out.

This deal is going to cost $1.9 billion dollars for JP Morgan, another seemingly sweetheart deal for the company. They also said that they would write down Washington Mutual's loan portfolio by $31 billion dollars. Also, JP Morgan announced that it would be raising $8 billion dollars by selling common stock to "raise its capital position".

The FDIC will not have to tap their insurance fund in order to cover the deposits of people at the failed bank - JP Morgan will be taking control of the company's deposits and its more than 2000 branches.

The end for the bank came when nervous depositors withdrew their money from the bank in droves throughout this week, leaving the bank with insufficient liquity to continue their operations.

Common shareholders in Washington Mutual will be completely wiped out as a result of the JP Morgan deal. Also, senior debt, preferred shareholders and subordinated debt holders will not be covered by this deal, according to an article on guardian.co.uk. It's important to note that JP Morgan is buying the banks and not the actual holding company.

If the government bailout deal ends up going through, JP Morgan will emerge from all of this chaos stronger than ever.

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Filed under: The Economic Meltdown |

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