Washington Mutual Purchased by J.P.Morgan Chase

[ziggy29]

Not all the assets. I expect the really bad debt will be cleaved from the assets and assumed by the Fed. http://www.nytimes.com/2008/09/26/business/26wamu.html?hp

I think JPM got some assurances that when and if this 'bailout' goes through, they will get relief from many of the toxic loans that dragged WM under.

I don't see the government convincing JPM to make this deal otherwise. They're not going to pay $1.9 billion for something with a negative net worth.

 

[IBWino]

Looks like the new WaMu CEO may walk away with almost $20 million after being on the job for only 17 days. I'd really like to learn how to negotiate contracts like that.

 

[ziggy29]

Looks like the new WaMu CEO may walk away with almost $20 million after being on the job for only 17 days. I'd really like to learn how to negotiate contracts like that.

If they can afford stupid compensation packages like this, then they don't need any bailout money.

 

[ChrisC]

Not all the assets. I expect the really bad debt will be cleaved from the assets and assumed by the Fed. There is more to this than is implied. No way did JP Morgan take on the worst of the bad debt as the credit crises is still not over.


http://www.nytimes.com/2008/09/26/business/26wamu.html?hp

I don't know where you get your information. The Chairman of the FDIC went on CNBC this morning and said it was a "whole bank" transaction. Here's the FDIC press release. FDIC: Press Releases - PR-85-2008 9/25/2008. There's nothing in the FDIC press release or in the NY Times article that suggests JP Morgan left any "bad debt" with the FDIC, as receiver. And in fact all qualified financial contracts were also assumed by JP Morgan Chase, where most of the "exotic" derivatives would be lodged.

If you had ever done anything remotely similar to one of these deals, you would know that unless you had months and months of time, with an army of forensic accountants and asset specialists, you would never be able to do enough due diligence in a short time period to cherry pick assets. And if the asset classes were so bad, JP Morgan would not have paid a $1.9 billion premium.

By the way, the Fed doesn't assume "bad debt" in these transactions. If any bad debt wasn't transferred, it would remain with the FDIC as receiver.

 

[guest]

Looks like the new WaMu CEO may walk away with almost $20 million after being on the job for only 17 days. I'd really like to learn how to negotiate contracts like that.

I think he was CEO for 18 years...BUT still...why not fire the guy the same way I would get fired if I screwed up my job.....unemployment at best!

 

[Gotadimple]

I think he was CEO for 18 years...BUT still...why not fire the guy the same way I would get fired if I screwed up my job.....unemployment at best!

No, Kerry Killenger was fired on 9/7. The new CEO (Allen Fishman) was immediately hired and negotiated a nice signing bonus and a bonus if the bank failed, or if he was able to reconstruct the debt and it turned out ok.

One of those win-win-win deals because the FDIC and Office of Thrift Supervision finally got through to the board that they were in big trouble.

-- Rita

 

[ziggy29]

No, Kerry Killenger was fired on 9/7. The new CEO (Allen Fishman) was immediately hired and negotiated a nice signing bonus and a bonus if the bank failed, or if he was able to reconstruct the debt and it turned out ok.

And as a result, he "earned" almost as much money in *one day* as I've made in a 21-year professional career.

 

[Canadian Grunt]

I don't know where you get your information. The Chairman of the FDIC went on CNBC this morning and said it was a "whole bank" transaction. Here's the FDIC press release. FDIC: Press Releases - PR-85-2008 9/25/2008. There's nothing in the FDIC press release or in the NY Times article that suggests JP Morgan left any "bad debt" with the FDIC, as receiver. And in fact all qualified financial contracts were also assumed by JP Morgan Chase, where most of the "exotic" derivatives would be lodged.

If you had ever done anything remotely similar to one of these deals, you would know that unless you had months and months of time, with an army of forensic accountants and asset specialists, you would never be able to do enough due diligence in a short time period to cherry pick assets. And if the asset classes were so bad, JP Morgan would not have paid a $1.9 billion premium.

By the way, the Fed doesn't assume "bad debt" in these transactions. If any bad debt wasn't transferred, it would remain with the FDIC as receiver.

"JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior debt holders were not acquired."

Please read the statement above again carefully, I took it from your link.

Secondly, JP Morgan acquired Washington Mutual. It was their subsidiary that incurred much of the bad debt. You need to read between the lines on media reports.

I have some experience in media deception and public spin. Taxpayers wouldn't want to know exactly what is happening with the banking system would they

 

[ChrisC]

"JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior debt holders were not acquired."

Please read the statement above again carefully, I took it from your link.

Secondly, JP Morgan acquired Washington Mutual. It was their subsidiary that incurred much of the bad debt. You need to read between the lines on media reports.

I have some experience in media deception and public spin. Taxpayers wouldn't want to know exactly what is happening with the banking system would they

I have some experience in these deals. And for depository institutions, senior debt and subordinated debt holders are unsecured general creditors, which are also in the category of general unsecured liabilities on the balance sheet of the bank. Not all "liabilities" of WaMu were acquired by JP Morgan, but all deposit liabilities were acquired if you read the release carefully. If you had some background about the intervention or liquidation of an entity, whether state or federal bankruptcy or receivership proceedings, you would know that "equity" holders (e.g. common stock owners) become general creditors holding a general liability claim against the bankruptcy or receivership estate. Thus, it would be correct to lump such equity holders in the category of subordinated and senior debt holders, which frequently have an equity piece to them.

The press release again says that "the assets" were acquired. This would include the "toxic assets" which might include mortgage backed securities, some of which you might have inadvertently characterized as "bad debt."

I don't profess to know anything about whether the "toxic assets" or "bad debt" as you suggested are in a subsidiary or the parent holding company. You made the claim that some assets from WaMu were not acquired, when the press release belies your claim.

Respectfully, you were not reading or understanding exactly what the press release was saying.

 

[guest]

No, Kerry Killenger was fired on 9/7. The new CEO (Allen Fishman) was immediately hired and negotiated a nice signing bonus and a bonus if the bank failed, or if he was able to reconstruct the debt and it turned out ok.

One of those win-win-win deals because the FDIC and Office of Thrift Supervision finally got through to the board that they were in big trouble.

-- Rita

my bad......now I'm for hanging/shooting/stringing up/.....or asking to be adopted

 

[harley]

I think so. If no deal is imminent by 3 PM Eastern Time today, watch the free-fall...

Hmmm...it appears to have free-falled (free-fallen?) up - 1.1% Dow, .34% S&P. Down a touch .15% on the Nasdaq, and that was because of RIM, not banking.

I really think the markets will doodle around a bit while an intelligent, non-knee jerk plan is worked out. We basically haven't moved significantly overall in the entire month of Sept. Down <2% in a month is an every day occurrence. Take a breath, do it right (or less wrong), and things will work out. Signed, Pollyanna.

 

[Canadian Grunt]

I have some experience in these deals. And for depository institutions, senior debt and subordinated debt holders are unsecured general creditors, which are also in the category of general unsecured liabilities on the balance sheet of the bank. Not all "liabilities" of WaMu were acquired by JP Morgan, but all deposit liabilities were acquired if you read the release carefully. If you had some background about the intervention or liquidation of an entity, whether state or federal bankruptcy or receivership proceedings, you would know that "equity" holders (e.g. common stock owners) become general creditors holding a general liability claim against the bankruptcy or receivership estate. Thus, it would be correct to lump such equity holders in the category of subordinated and senior debt holders, which frequently have an equity piece to them.

The press release again says that "the assets" were acquired. This would include the "toxic assets" which might include mortgage backed securities, some of which you might have inadvertently characterized as "bad debt."

I don't profess to know anything about whether the "toxic assets" or "bad debt" as you suggested are in a subsidiary or the parent holding company. You made the claim that some assets from WaMu were not acquired, when the press release belies your claim.

Respectfully, you were not reading or understanding exactly what the press release was saying.

To paraphrase the release one more time, "claims of equity, subordinated debt, and senior debt holders were NOT acquired." This means there were some assets that were not transferred to JP Morgan. These claims include the bad debt and are part of WAMU's subsidiary.

JP Morgan got the outlets and deposits. They did NOT assume all the liabilities of WAMU. The Fed will absorb the worst of the bad debt outstanding on WAMU’s bad mortgages.

It is ludicrous to think JP Morgan would be stupid enough to make the deal without cleaving the worst of the bad debt. It was that very debt that sank WAMU, if they accepted the bad debt onto their balance sheet without assurances from the government they would go under also.

 

[ChrisC]

To paraphrase the release one more time, "claims of equity, subordinated debt, and senior debt holders were NOT acquired." This means there were some assets that were not transferred to JP Morgan. These claims include the bad debt and are part of WAMU's subsidiary.

JP Morgan got the outlets and deposits. They did NOT assume all the liabilities of WAMU. The Fed will absorb the worst of the bad debt outstanding on WAMU’s bad mortgages.

It is ludicrous to think JP Morgan would be stupid enough to make the deal without cleaving the worst of the bad debt. It was that very debt that sank WAMU, if they accepted the bad debt onto their balance sheet without assurances from the government they would go under also.

I repeat you simply don't understand things. This was not a "good bank, bad bank" transaction, where bad bank assets stay with the FDIC! It was a "whole bank" transaction. I'm sorry but you're clueless about the nature of these transactions and it really shows. You're confusing the liability side with the asset side of a bank's balance sheet! And you're second guessing the valuation of assets.

Now you'll tell me that the open bank assistance deal the FDIC just struck with Citibank over the acquisition of Wachovia also had a bad bank feature to it.

It's really pointless to discuss these things with someone who clings to an understanding of transactions which is frankly confusing and not correct.

 

[Canadian Grunt]

I repeat you simply don't understand things. This was not a "good bank, bad bank" transaction, where bad bank assets stay with the FDIC! It was a "whole bank" transaction. I'm sorry but you're clueless about the nature of these transactions and it really shows. You're confusing the liability side with the asset side of a bank's balance sheet! And you're second guessing the valuation of assets.

Now you'll tell me that the open bank assistance deal the FDIC just struck with Citibank over the acquisition of Wachovia also had a bad bank feature to it.

It's really pointless to discuss these things with someone who clings to an understanding of transactions which is frankly confusing and not correct.

Yes, I don't understand....The liabilities you talk about used to be assets. The mortgages! They only became liabilities when housing prices declined. My original claim was this was not a whole bank transaction. I think I proved the point. End of argument.

I won't bother with the personal insults; they are the mark of an inferior position and a closed mind.

 

[ChrisC]

Yes, I don't understand....The liabilities you talk about used to be assets. The mortgages! They only became liabilities when housing prices declined. My original claim was this was not a whole bank transaction. I think I proved the point. End of argument.

I won't bother with the personal insults; they are the mark of an inferior position and a closed mind.

And you're original claim was wrong, wrong, wrong -- I said it three times and you keep on insisting you're right, even after painfully explaining the first or second time how wrong you were. It's kind of exasperating to me, especially when you make assumptions that are made out of thin air.

In what world do you live in where assets become liabilities on a bank's balance sheet? A bank makes a loan -- that's an asset on the bank's balance sheet. If the loan becomes delinquent or "charged-off", that's still an asset that has been written-down or marked-down. Mortgage backed securities are assets on the balance sheet of the bank. On the other hand, equity claims and bondholders of debt issued by WaMu are liabilities. These liabilities were not acquired or assumed by JP Morgan. All of the "deposit liabilities" were acquired. And the assets were acquired as well -- no assets were left behind according to the press release.

The only thing you proved is that you stubbornly cling to an understanding that makes no sense and are prone to engage in ad homenim.

 

[FinanceDude]

The FDIC was involved. They seized WAMU. JP Morgan then did the deal with the FDIC. Fortunately for us taxpayers, JP Morgan took on the assets and paid FDIC for them. It didn't have to happen that way - FDIC might have been stuck with it.

Audrey

True. WAMU had no choice, they were insolvent. Obviously the ONLY bank that has any interest was Chase, it fits a void they have in certain markets. Rather than stick FDIC with the bill, and stay out of the mess, Chase got to "pick the bones", and take only the assets they wanted. It's not like WAMU had any leverage to bargain with.

Bottom line, we can talk all we want about how dumb a lot of Wall Streeters are, but I would NOT include Jamie Dimon in tha group......

 

[Canadian Grunt]

And you're original claim was wrong, wrong, wrong -- I said it three times and you keep on insisting you're right, even after painfully explaining the first or second time how wrong you were. It's kind of exasperating to me, especially when you make assumptions that are made out of thin air.

In what world do you live in where assets become liabilities on a bank's balance sheet? A bank makes a loan -- that's an asset on the bank's balance sheet. If the loan becomes delinquent or "charged-off", that's still an asset that has been written-down or marked-down. Mortgage backed securities are assets on the balance sheet of the bank. On the other hand, equity claims and bondholders of debt issued by WaMu are liabilities. These liabilities were not acquired or assumed by JP Morgan. All of the "deposit liabilities" were acquired. And the assets were acquired as well -- no assets were left behind according to the press release.

The only thing you proved is that you stubbornly cling to an understanding that makes no sense and are prone to engage in ad homenim.

We will find out over the course of this restructuring that the Fed has guaranteed a floor for the transaction, thus, some liabilities were not transferred although JP Morgan will still have them on their books. If I give you $5.00 worth of debt and guarantee $2.00 worth of that debt are you on the hook for all the $5.00 worth of debt or only the $3.00 that is not guaranteed? They just did the same thing for City Bank and JP Morgan when they bought Bear Stearns. Understand? Some debt was cleaved.

This is my point. Accounting is subjective.

 

[ChrisC]

We will find out over the course of this restructuring that the Fed has guaranteed a floor for the transaction, thus, some liabilities were not transferred although JP Morgan will still have them on their books. If I give you $5.00 worth of debt and guarantee $2.00 worth of that debt are you on the hook for all the $5.00 worth of debt or only the $3.00 that is not guaranteed? They just did the same thing for City Bank and JP Morgan when they bought Bear Stearns. Understand? Some debt was cleaved.

This is my point. Accounting is subjective.

Let's try to use conventional terms understood by bankers, regulators and accountants, please. First, an IOU from a Bank, like a deposit account or bonds issued by the bank, is a liability on the balance sheet of the bank. An IOU to the bank from a borrower or a mortgage-back security (e.g a collaterialized debt obligation) is an asset on the bank's balance sheet. Banks use deposit liabilities to fund assets, and the spread they receive is how that earn most of their income. Secondly, it's not the Fed (commonly understood to mean the Federal Reserve Board or the Federal Bank of New York for these extraordinary cases), but the FDIC involved in WaMu. So, what happened to AIG or Bear Stearns with the Fed, is not really transferrable to what the FDIC does with insured depository institutions, whether thrifts like WaMu or a commercial bank like Wachovia.

Your post, I'm sorry to say, is incomprehendible to me. I don't understand what you mean. Are you talking about someone issuing debt, i.e. like a bond to the public? If you issue debt, you're on the hook for the entire amount. I know of no legal or finance construct where the issuer of debt is both the obligor and the guarantor -- makes no sense to say that you both owe $5 and guarantee the payment of $5.

So, I presume that what you mean is that if a bank purchases a $5 million mortgage backed security, which is an asset on the bank's balance sheet, or if it holds a portfolio of $5 million subprime loans that it issued to a group of borrowers who have credit problems, the value of that asset has been marked-down to $3million because of the housing down-turn and market phobia. If you further mean that JP Morgan received credit protection from the FDIC for further potential deteriation in that asset, well that's simply not the deal I've read about in the newspaper for JP Morgan's acquisition of the whole bank of WaMu, in a "closed-bank" transaction, where WaMu actually failed and was placed in FDIC receivership.

This is sharply contrasted to the deal with Wachovia, an "open bank" deal, where the shareholders were not wiped out, and there is some credit protection (in the form of loss protection) for "bad assets" on the balance sheet of Wachovia. Credit protection has been extended by the FDIC but the FDIC is taking an equity piece in the transaction as the quid pro quo for its credit protection, known in the trade as "covered asset loss protection.

You assumed too many things and confused transactions made by the Fed for an investment bank and insurance company with FDIC transactions for insured depository banks.

 

[copyright1997reloaded]

We will find out over the course of this restructuring that the Fed has guaranteed a floor for the transaction, thus, some liabilities were not transferred although JP Morgan will still have them on their books.

Canadian, please go back and see my original post on the (#5 in the thread), and go out and read the OTS, FDIC, and finally the JP Morgan Chase materials about the transaction. There was no guaranteed floor (unlike the Citibank/Wachovia setup and unlike the BSC takeover).

To summarize:
JPM bought the banking portion of WAMU. This included the physical assets (banks) as well as the assets on the books (mortgages, HELOC's, credit card, etc.) Note that these are the ASSETS portion of the deal. They also assumed the deposits and secured liabilities of the banking sub. These are the LIABILITIES from the deal. So, what LIABILITIES weren't picked up?

From the JPM press conference materials:

Transaction does not include:
&#56256;&#56452; Assets and liabilities of Washington Mutual Inc. (Holding Company)
&#56256;&#56452; Unsecured senior debt, subordinated debt and preferred of
Washington Mutual’s banks

What this means in layman's terms is the stock, preferred stock, and unsecured bonds were not assumed by JPM, and the stockholders/bondholders will be fighting for whatever scraps are leftover.

Also from the materials:
$1.9bn cash payable to FDIC (in "Consideration")

Now here's where it gets interesting. JPM took WAMU's asset base (i.e. those wonderful mortgages/option arms, and heloc's, etc, which were on WAMU's books @ $296 billion and immediately wrote them down by approximately $31 billion. Because of this, their own capital ratio's would have been impacted with WAMU's assets and liabilities on their books. (Before the acquisition their (JPM) Tier I capital ratio as of 6/30/2008 was 9.2.) This is the reason it was necessary for them to do the $8 Billion announced (actual done was $10 Billion) in stock equity the following morning. After the acquisition and WITH an assumed $8 Billion in new equity raised, their Tier I ratio would be 8.3. Thus, you can see the negative impact of the WAMU assets.

So why did they do this? (Opinion only, so standard disclaimers apply)
1. Increases the # of branches by 2/3
2. Instantly gives them a major west coast and Florida deposit base
3. Provides a big base in area's with higher growth rates in population
4. Take all/most? of the medicine (ie asset write-down) on acquisition to allow for more positive impact to income statement later.

If you are unclear about what any of this means, please feel free to ask.

 

[Gotadimple]

Just adding info for those who aren't reading the Seattle papers:

* Jamie Dimon believes he got a good deal, but admits it could result in significant losses if they can't reconstruct the loans.
* Washington Mutual, Inc filed for Chapter 11 bankruptcy last Friday in Delaware, and is due in court this Friday to explain the need to the judge. "In its filings, WaMu said it had about $8 billion in debt and $32 billion in assets. . ."

-- Rita

 

[ChrisC]

Copyright, excellent description of the WaMu transaction, although I'm sure the subordinated debt, senior debt, preferred equity were not at the holding company level.

I would add 2 other reasons for JP Morgan to purchase WaMu (disclaimers also apply here) : (1) recent regulatory changes by the banking regulators which permit booking of "goodwill" to regulatory capital for these transactions; (2) JP Morgan wants to grow and be the dominant universal bank.