Washington Mutual's final days — The deal Puget Sound Business Journal (Seattle) — December 28, 2009 Comments » assets for 1.5 cents on the dollar. Was it really a last-minute deal or did the New York bank make detailed plans in advance? advance?
On Oct. 16, 2008, JPMorgan Chase’s communications team sat down to dinner with its Washington Mutual counterparts in a private room at Purple, a swanky downtown Seattle wine bar.
CEO Jamie Dimon, had purchased WaMu from the federal government after regulators seized the bank, saying it was about to fail.
Now, with an understanding audience, WaMu’s team complained about negative news reports that had deposit run in its final weeks.
We couldn’t “get ahead of the story,” said one of them, according to former WaMu employees who attended the meeting.
The JPMorgan team sympathized, then made a jarring remark.
We were watching money “fly out of the bank,” from a “war room” at JPMorgan’s New York headquarters, said one JPMorgan executive, according to these people.
WaMu staffers who heard the comment were startled. They believed that kind of detailed information was strictly confidential, known only to a select handful at WaMu — and the bank’s federal regulators.
“There were several of us that looked at each other and thought, ‘Did he just say that?’” said one former employee who attended.
A JPMorgan official who was at the meeting denied this week that the remark was made and that the bank had such information. Dimon and other officials declined repeated requests to comment further for this story.
If JPMorgan had this kind of inside knowledge of WaMu’s deposit run, that means the corporate privacy of the nation’s largest savings-and-loan could have been compromised — with immense implications for WaMu executives, the bank and its thousands of shareholders. At the time, just weeks before WaMu’s Sept. 25 seizure, the executives were trying quietly to sell the bank, and were at the same time battling, with the help of the communications team, to control WaMu’s image and quash rumors about financial problems during the intense financial turbulence of 2008.
It’s possible JPMorgan received the information through a normal due diligence process: The bank had signaled its interest in WaMu’s auction and had access to its “data room” of financial reports. But a WaMu executive familiar with WaMu’s bidders at the time said that detailed deposit outflow information was not handed out to prospective buyers.
A long-term plan Now, more than a year after WaMu’s closure, recently released court documents and an ongoing investigation by the Puget Sound Business Journal suggest that JPMorgan was working months in advance on a plan to acquire WaMu once the government seized the bank from its shareholders.
The documents also appear to show that regulators were working with JPMorgan to structure the deal well before the bank was seized.
The Business Journal reviewed more than 1,000 pages of internal JPMorgan emails and financial presentations produced as exhibits in court filings as well as public records released through the Freedom of Information Act, and interviewed dozens of people familiar with WaMu’s closure, including government officials, former regulators and outside experts.
The new information shows that JPMorgan had a detailed plan to acquire WaMu from regulators as early as July 2008, more than two months before the tumultuous days in late September when the government formally signaled that it planned to seize WaMu and offer it to bidders.
By Sept. 11, JPMorgan appeared to expect that WaMu would be taken over by the government, and was making detailed preparations to buy it as a distressed asset, according to the documents. the bank’s preparations suggest that regulators had signaled they planned to close the bank even as Sheila Bair, the chairman of the FDIC, was telling WaMu’s chief executive that she was helping them find a private buyer.
Regulators cited a run on WaMu deposits as their reason for seizing it on Sept. 25. But the court documents show run started on Sept. 11.
The documents were filed by WaMu’s failed holding company in U.S. Bankruptcy Court in Delaware. The company is now seeking to expand the subpoena to include documents from regulators, government agencies, rating agencies and others with potential knowledge of the events Regulators have declined the Business Journal’s public- records requests seeking those documents, or have released documents that are largely blacked out. They also have declined repeated requests to comment.
Throughout this period, WaMu was in serious, but not critical, condition. In the first half of 2008, it reported it had lost about $4.5 billion, a staggering sum. That loss was due mainly to money it had set aside to cover potentially bad mainly to money it had set aside to cover potentially bad mortgage loans. Despite the loss, its capital level stood $7 billion in excess of what regulators required. On the day it was seized, WaMu also had $29 billion in additional, ready cash to pay out to depositors if needed. It also had access to another $8.2 billion in cash from the Federal Reserve, a line of credit it had not tapped. Numerous other banks nationwide currently are operating with proportionally less capital and cash than WaMu had on the day it was closed.
Even so, under pressure from federal regulators, WaMu executives jetted to the East Coast frequently in September seeking additional capital and a buyer for the bank through an auction to be arranged by Goldman Sachs.
Had executives succeeded in securing either deal, they would have prevented the collapse in WaMu’s stock and bond prices that resulted from the government sale, and that cost investors billions of dollars.
They never got the chance. In what became known as the biggest bank failure in U.S. history, the regulators seized and sold WaMu five days before the Sept. 30 deadline, and six days before Congress passed the Troubled Asset Relief Program to provide bailout money to banks, including WaMu.
Many investors still are grappling with their losses — life savings, retirement accounts, college funds, pension money.
One Seattle family mourns a deeper loss, that of a WaMu executive, a husband and father, who recently took his own life after losing his job at the bank.
Unusual process
In a typical bank closure, the Federal Deposit Insurance Corp., in charge of putting failed banks up for sale, is supposed to remain impartial until it is evaluating bids. At that point, the agency chooses the bid that represents the least cost to the deposit insurance fund, a pool of money it manages to insure bank customers. The bank’s main regulator, in WaMu’s case, the federal Office of Thrift Supervision (OTS), isn’t involved in the process of selling the bank at all.
In WaMu’s sale, however, government officials on at least two occasions over several months appeared supportive of familiar with the matter.
In March 2008, the head of the OTS warned WaMu executives to take seriously JPMorgan’s offer to buy WaMu for about $8 billion. WaMu spurned that offer, saying it wanted to remain independent.
In July, Treasury Secretary Henry “Hank” Paulson admonished WaMu executives for turning JPMorgan down, according to people familiar with the discussions.
Much of the detail about JPMorgan’s activities during this crucial period remains unknown. But recently, JPMorgan was forced to release a number of emails and internal documents about its activities, in response to the subpoena filed in June by the bankrupt holding company for WaMu.
The documents support a separate lawsuit filed by WaMu bondholders in early 2009, alleging that JPMorgan used confidential information it obtained about WaMu to negotiate a better deal with government regulators, influence regulators to seize WaMu prematurely and leak information to the media in the weeks before its September closure, causing its bank run.
Dimon, in an interview with reporters in Seattle during the summer of 2009, dismissed the allegations in the bondholders’ lawsuit as “conspiracy theories” and called the allegation that JPMorgan was abusing access to confidential information a “pathetic and ridiculous statement.”
With his commanding presence, the silver-haired, blue-eyed CEO seemed gracious but also easily provoked at the meeting “There are tons of lawsuits,” he told reporters, “and we’re going to defeat them all.”
A stunning deal
In purchasing Washington Mutual out of government receivership, JPMorgan pulled off one of the biggest banking coups in history. It acquired, by the government’s reckoning, $307 billion in assets and paid just $1.88 billion for them The assets included 2,239 WaMu branch offices, two Seattle office towers, $24 billion in salable securities, and about $118.9 billion in loans, which count as assets because they are due to be paid back to the bank. JPMorgan also acquired deposits worth $188 billion. Although deposits count as liabilities, since they must be paid back to customers, they also measure a financial institution’s standing among its peers and its market share.
Calculating the price based on assets minus deposits, about one and a half cents on the dollar for WaMu.
WaMu’s assets were worth so much more than JPMorgan paid that even after the company wrote down its nonfinancial assets to zero, it still booked a $1.9 billion gain in 2008, through an accounting method involving “negative goodwill.” That type of gain is rarely seen, according to accountants and bankers, except in cases where the acquirer has grossly underpaid.
“For accounting purposes, they got their buildings for nothing,” said David Lee, a partner at accounting firm Peterson Sullivan in Seattle.
According to FDIC records, the only other bid for WaMu that arrived during the one-day bid period came from Citigroup and that offer failed to meet the specific terms that the FDIC sought. The FDIC blacked out the terms in documents it released under the Freedom of Information Act.
More than a year later, the acquisition is earning billions of dollars for JPMorgan, a $2 trillion financial conglomerate. The losses it expected on WaMu’s giant portfolio of sour mortgage loans have so far failed to materialize. Instead, loans. And because JPMorgan paid so little for the loans, and discounted their value further, most of what it is now earning counts as profits.
JPMorgan does not break out WaMu earnings in its financial results. But since acquiring the bank, JPMorgan’s revenue from loans has jumped 53 percent, to $12.7 billion in the second quarter of 2009, from $8.3 billion in the prior-year quarter, before the acquisition.
The purchase gave JPMorgan more than a financial bargain, however. It propelled the storied bank, which emerged successfully from both the banking panic of 1907 and the ruins of the Great Depression, up the list of giant financial institutions, expanding both its deposit base and its national footprint.
The deal also burnished Dimon’s image. While other Wall Street mainstays have shuttered or been gobbled up in mergers at a dizzying speed — Lehman Bros., Merrill Lynch, Wachovia, to name a few — JPMorgan under Dimon’s leadership has won accolades for rescuing failed banks. Before it bought WaMu, JPMorgan snapped up Bear Stearns for $10 a share in the spring of 2008, after that investment bank suffered a run.
“They’ve gone from a very good investment bank to one of the best in the world,” said Jeffrey Harte, an analyst with New York-based Sandler O’Neill Partners.
Dimon has emerged as a golden boy. As Wall Street bankers are vilified, President Barack Obama praised Dimon for “doing a pretty good job managing an enormous portfolio” and reportedly is considering Dimon for Treasury secretary, a position that would allow him to oversee not just the operations of a giant company, but of the entire financial system.
“Project West”
Dimon, an ambitious deal-maker who in the 1990s worked with legendary financier Sanford Weill to build Citigroup into the world’s largest financial services company, had long coveted Washington Mutual.
His lust for WaMu’s network of thousands of branches began long before the financial crisis. On at least two occasions prior to 2008, he informally broached the idea of a merger with Kerry Killinger, WaMu’s longtime chief executive, according to people familiar with the matter.
That sort of informal chatter wasn’t uncommon for the 53- year-old Dimon, he told reporters in Seattle during a visit last summer. “CEOs often say to each other, ‘If you ever think of doing something, give me a call.’ I’ve done that many times with many people.’”
In Dimon’s eyes, WaMu would supply a missing piece in branded with the Chase name, covered the East Coast, the bank had little presence west of the Mississippi River. WaMu, meanwhile, had grown rapidly, and had a major network not just in the Pacific Northwest, but in California, Texas, Arizona and Florida.
According to a JPMorgan report prepared for a July board meeting, the combination with WaMu would catapult branches, and from third to first in terms of deposits, surpassing Citibank and Bank of America by more than $100 billion, according to the court exhibits in the WaMu bankruptcy case. Those predictions would prove slightly optimistic, as the financial crisis led to other mergers that reshuffled top rankings.
In March 2008, Dimon and his team made their first official play for WaMu.
They called the deal “Project West,” according to internal emails and presentations recently revealed through court exhibits. They referred to JPMorgan as “Park,” presumably after the Park Avenue location of its headquarters.
WaMu, reeling from the recent collapse of the subprime security market and growing losses in its mortgage loan portfolio, needed extra cash to survive the next few years. It hired two investment banks, Lehman Bros. and Goldman Sachs, to look for capital.
By the middle of March, WaMu had four offers on the table Three came from private equity groups, including TPG of Texas. A fourth, from JPMorgan, offered $8 billion, with a contingency placed on the performance of WaMu’s home loans. If losses grew, JPMorgan’s offer would decrease, according to people familiar with the deal.
The price tag was more than four times what JPMorgan eventually paid. In preparing the offer, scheduling board meetings and planning an April announcement of the purchase, court exhibits show.
At the time, however, Killinger was determined to keep the bank independent, according to former WaMu executives Indeed, few members of the executive team at the time were in favor of selling to JPMorgan, their longtime competitor. It would be five months before WaMu
executives would begin trying to sell the bank.
At an end-of-March meeting at the Seattle headquarters building, Killinger sat with investment advisers around a conference room table, running through the final details of the TPG offer. A secretary interrupted the meeting to whisper to Killinger that he had a call. He appeared shaken and left the room, according to people familiar with the meeting.
WaMu executives later learned the call had come from John Reich, the head of the Office of Thrift Supervision and WaMu’s main regulator. Reich, according to people familiar with the call, told Killinger that representatives of JPMorgan were in Washington, D.C., lobbying regulators for the Washington Mutual purchase.
“You better take this seriously,” Reich told Killinger, according to people familiar with the call.
For WaMu executives, the exchange not only reaffirmed illustrated the New York bank’s far-reaching clout in D.C. It was the type of influence that had somehow eluded Killinger, despite his previous years of banking successes.
The call from Reich did not change the minds of WaMu executives. On April 8, Killinger and his team announced their choice: the TPG investment of $7.2 billion.
JPMorgan’s other business
Dimon, a Democrat, is known for his lobbying efforts in Washington, D.C. Government relations, he told The New York Times recently, is his seventh line of business.
In particular, Dimon appeared to be on close terms with Paulson, the former Treasury secretary who spearheaded efforts to push billions of government dollars into banks during the 2008 crisis, oversaw the bankruptcy of Lehman Bros. and orchestrated the rescue of AIG, an international insurance company.
His department also oversees the FDIC and the OTS, in charge of regulating WaMu and hundreds of other banks.
According to official records, Paulson and Dimon spoke at least 25 times for a total of more than five and a half hours in 2008. That tally is based on calendar records released by the Department of Treasury in response to a Business approach with Dimon, adding handwritten notes to official letters to him.
By comparison, Paulson and Killinger spoke only twice, at the end of July 2008, according to records. Both times Killinger made the calls.
A surprise call
On Monday, July 21, more than three months had passed since WaMu chose TPG over JPMorgan. Dimon was stil intent on purchasing the bank. Several of his executives, including Charlie Scharf, head of the retail bank, emailed each other that morning, discussing possible capital alternatives involved in the “West” purchase, according to internal emails.
In New York, the JPMorgan executives were brainstorming
alternatives for structuring the deal, which appear to have included government assistance, the emails show.
“We are thinking through how to make up the assisted get more color tomorrow with regulators — if not, will make something up.”
At the time, WaMu’s first bank run was under way, sparked in part by the rapid closure of California-based mortgage lender IndyMac. The run was not made public, although it was later detailed in a report by the Business Journal.
In Seattle, Killinger had heard that Jim Cramer, host of the CNBC investing show “Mad Money,” planned to feature WaMu in an upcoming segment. Killinger feared that would bring additional negative publicity and could prolong WaMu’s deposit run, according to people familiar with Killinger’s actions.
On that day, July 21, the bank had lost $500 million in deposits.
Killinger picked up the phone in his 33rd floor office. He called both Reich at the OTS and Bair at the FDIC, to express his concern. They said they would see what they could find out about Cramer’s show, according to people familiar with the calls.
Later that afternoon, Killinger called Paulson and received a different reaction.“You should have taken Jamie Dimon’s offer,” Paulson told him, after listening to his concerns. Killinger hung up the phone believing that Paulson didn’t care whether WaMu survived, according to a person familiar with the call.
“Kerry was dumbfounded and he didn’t really respond,” said a person familiar with the call. “He hung up and was very upset.”
Cramer later advised investors to sell WaMu.
