Washington Mutual: Now the Largest Bank Failure in History

On Thursday evening, WaMu became the 13th bank failure of the year, closed by the Office of Thrift Supervision and subsequently acquired by New York City-based JPMorgan Chase.

WaMu's level of safety and soundness had been rumored to be in trouble by many banking experts. The bank, which had lost $22 billion in cash outflow in part to adverse publicity surrounding its situation, and known best for its mortgage lending business, had been doing heavy advertising on television and other media to attract more retail customers in the last year.

The WaMu banks have combined assets of $307 billion and deposits of $188 billion. The FDIC facilitated the acquisition wherein JP Morgan Chase took all the assets and paid $1.9 billion. The FDIC stated in a release on Thursday evening that all depositors are fully protected, and there will be no cost to the FDIC's Deposit Insurance Fund.

This fund had been the focus of a recent story by Bloomberg -- and a quick reaction by FDIC where the federal regulatory agency refuted the claims made in the story that the FDIC's deposit insurance fund was possibly in trouble if a large bank failed. (See: FDIC's Open Letter to Bloomberg).

The FDIC's Chairman Sheila Bair reassured WaMu's customers, stating in its release, "For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks." She notes there will be no interruption in service. "For bank customers, it will be a seamless transition. Bank customers should expect business as usual come Friday morning."

JPMorgan Chase, along with acquiring the assets of WaMu, also assumed the qualified financial contracts. Claims by equity, subordinated and senior debt holders were not acquired.

"WaMu's balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses," Bair states.

Also on Thursday, political leaders debated the details and merits of a prospective $700 billion bailout package aimed at easing strains on the financial services industry. Negotiators were expected to return to the table Friday morning to continue discussions.