American financial goliath JP Morgan Chase yesterday became even bigger in the wake of its takeover of Washington Mutual, its second government-brokered shotgun deal in six months, making it clear that the bank will likely emerge from the financial storm stronger and tougher.
Washington Mutual, the largest banking failure in American financial history, was seized by federal regulators late on Thursday night, and yesterday watched as its assets were transferred to JP Morgan Chase for $1.9bn (£1bn) as part of an emergency deal to avert another potentially massive tax- payer bill for the rescue of a collapsing giant.
The acquisition of the Seattle-based bank, which was among the worst hit by the housing crisis and symbolised to many the excesses of the mortgage boom, comes just six months after JP Morgan Chase snatched New York investment bank Bear Stearns from the jaws of death.
The deal with Washington Mutual, the US's largest savings and loan association, now creates a nationwide retail banking institution that rivals Bank of America, and makes it clear that JP Morgan Chase will likely emerge as a major victor when the dust of the financial crisis finally settles.
The purchase is also seen as a major step in cleaning up a US financial system littered with so-called toxic mortgage debt, the problem at the very heart of the global financial crisis. JP Morgan Chase will now take on Washington Mutual's troubled mortgages and credit card loans and it will also absorb at least $31bn in losses.
Alison Porter, co-head of US equities at Glasgow-based Resolution Asset Management, told The Herald: "There are now much bigger differences between good banks and bad banks.
"I should point out that JP Morgan Chase is one of our biggest financial holdings, but we think this is a great deal - and rather than stretching them, it puts them in an even stronger position.
"The bank has also raised $8bn to pay for it. We think there may be some other acquisitions - not big ones, but quite possibly some smaller deals."
While the Washington Mutual deal ends the Seattle bank's 119-year run as an independent company, it gives JP Morgan Chase 5400 branches, including those in California and other markets where it does not have a major presence.
It also fulfils JP Morgan chief executive Jamie Dimon's long-held goal of becoming a retail banking force in the western US.
For decades, savings and loan (S&L) associations, also known as thrifts, had been the staple of the US economic landscape, whose major business was making mortgage loans within their community.
However, in what became known as the S&L crisis of the late 1980s, hundreds of thrifts became involved in a plethora of bad loans that ended in a government bail-out that ultimately cost taxpayers more than $120bn.
This time, however, there was no bail-out. Washington Mutual, which has $307bn in assets, is the biggest bank failure in history.
While the Federal Reserve and the US Treasury Department had reportedly been anxious about Washington Mutual for months, and pushed for it to sell itself, the bank publicly insisted it could stay independent.
Then it emerged that the giant had secretly hired Goldman Sachs to find potential bidders, but no offer came forth.
However, as fear tightened its grip on stock markets last week in the wake of the Lehman Brothers collapse, Washington Mutual customers began withdrawing their cash.
On Wednesday afternoon the government stepped up its efforts to sell off the stricken bank and a number of bids were solicited. The following day JP Morgan Chase was told it had won. It emerged last night that Alan H Fishman, the Washington Mutual chief executive on the job since September 8, is entitled to more than $13m in severance and bonus pay, according to a company filing with the Securities & Exchange Commission.
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