Washington Mutual Bankruptcy

The Story Behind the Largest Bank Failure in History

Man Entering WaMu
Washington Mutual was the largest bank failure in history. Credit: Robert Giroux/Getty Images

What Is Washington Mutual?

Washington Mutual was a Savings and Loan that became the largest failed bank in U.S. history. Its biggest customers were individuals and small businesses. By the end of 2007, it had more than 43,000 employees, 2,200 branch offices in 15 states and $188.3 billion in deposits. Nearly 60% of its business came from retail banking, 20% from credit cards, 14% from home loans and 6% from commercial lending.

The home loan business caused it to go on life-support. That created an old-fashioned, panic-driven run on deposits from its retail banking side that delivered the death knell.

WaMu's Decline

WaMu was fine until August 2007, when the secondary market for mortgage-backed securities disappeared. WaMu could not resell these mortgages. The housing decline meant it couldn't sell new mortgages and take in new cash.

By Q4 2007, it had to write-off $1.6 billion in defaulted mortgages. It also had to set aside additional cash to provide for future losses, resulting in a total net loss for the quarter of nearly $2 billion.

As a result, WaMu reported a net loss of $67 billion for 2007, after just reporting a profit of $3.6 billion for 2006. (Source: WaMu 2007 Annual Report)

WaMu Was Hit Hardest by California Housing Decline

Nationally, home values increased until 2006. They reached a peak of 20% year-over-year growth in 2004.

But by the second half of 2007, home values started declining. By the end of 2007, the national average home value was down 9.8%. That hadn't happened since the Great Depression.

WaMu did a lot of business in California. The housing market there did worse than in other parts of the country. By the end of 2007, there was 15 months worth of unsold housing inventory.

That's compared to ten months nationally and six months during normal times. WaMu only wrote 20% of its mortgages at​ greater than 80% loan-to-value ratio. But by the end of 2007, many loans were more than 100% of the home's value. That's because housing values fell so fast.

Lehman Brothers Bankruptcy Caused Run on Deposits

On September 15, 2008, Lehman Brothers declared bankruptcy. That panicked WaMu depositors. They withdrew $16.7 billion out of their savings and checking accounts over the next ten days. It was about 10% of WaMu's deposits. That meant the Federal Deposit Insurance Corporation (FDIC) said the bank had insufficient funds to conduct day-to-day business. The government started looking for buyers. For more, see Timeline of the 2008 Financial Crisis.

JPMorganChase Bought the Bank for $1.9 Billion

On September 25, the FDIC took over the bank and sold it to JPMorganChase for $1.9 billion. The next day, Washington Mutual Inc, the bank's holding company, declared bankruptcy. It was the second largest bankruptcy in history, after Lehman Brothers.

On the surface, it seems that JPMorganChase got a good deal since WaMu had about $300 billion in assets. But no other bank bid on WaMu, including Citigroup, Wells Fargo,  and Banco Santander South America.

  That's because the buyer had to write down $31 billion in bad loans. It also needed to raise $8 billion in new capital to keep the bank going.  (Source: WSJ.com, "WaMu Is Seized," September 26, 2008)

Who Suffered the Losses?

Bondholders lost all $30 billion in their investments in WaMu. Most shareholders lost all but two cents per share. Others lost everything. For example, Texas Pacific Group lost its entire $1.35 billion investment. The WaMu holding company sued JPMorgan Chase for access to $4 billion in deposits that it wanted back. Deutsche Bank sued WaMu for $10 billion in claims for defunct mortgage securities. It said that WaMu knew they were fraudulent and should buy them back.  It was unclear whether the FDIC or JPMorgan Chase was liable for many of these claims. (Source: "4 Ways Washington Mutual Still Matters," Forbes, February 22, 2012.)