How J.P. Morgan Raised $11.5 Billion in 24 Hours
http://blogs.wsj.com/deals/2008/09/29/how-jp-morgan-raised-115-billio...
Three weeks before JPMorgan bought WaMu’s deposits for $1.9 billion,
officials at the Federal Deposit Insurance Corporation had called
JPMorgan to say that the FDIC was carefully monitoring WaMu and that a
seizure of its assets was likely. There have been no news articles
indicating that the other banks were notified at that time.
http://blogs.wsj.com/deals/2008/09/29/how-jp-morgan-raised-115-billio...
Since the seizure, JPMorgan and the FDIC have challenged Washington
Mutual Inc (the Holding Company that owned WMB) on tax benefits of
writing off its losses prior to the seizure.
http://www.reuters.com/article/governmentFilingsNews/idUSN30259446200...
01/22/09: JPMorgan objects to having to show what they bought (file
claim) by 3/31/09. That may be because they can't; there is no list
in the Purchase and Assumption Agreement (3.1a), although the purchase
agreement cites there should be. The purchase agreement is incomplete.
JPMorgan objected to having to show any claim by the claim filing
deadline. Their objection was overruled by Judge Walrath, the judge
presiding over the bankruptcy case.
http://www.kccllc.net/documents/0812229/0812229090122000000000001.pdf
Claim against the FDIC
02/05/09: Weil and Gotshal have filed a claim against the FDIC
(December 30, 2008). WMI was given $0.00 for the bank, despite a book
value well over $20 billion at the time of seizure. The FDIC failed to
get a reasonable price, even though they are required by law to
maximize the return on the assets seized as well as to minimize the
impact to the FDIC fund. There are many differing opinions on what
the value of the bank was, but of the sources we could find, none felt
the bank was worth a mere $1.9 Billion. JPMorgan got the bank at a
substantial discount, as they have documented well in their SEC
filings. They even booked a $1.9 Billion gain the next quarter – not a
bad return for three months. The FDIC also gave JPMorgan many
subsidiaries. Some of those subsidiaries may not have been on the
banks books, and in fact may have belonged to the parent holding
company, Washington Mutual Inc (WMI). WMI filed a claim against the
FDIC's receivership on 12/30/2008. According to a Weil & Gotshal
representative, the claim submitted to the FDIC was denied in late
January 2009.
Page 9
http://www.kccllc.net/documents/0812229/0812229090205000000000005.pdf
SEC did not do its job; illegal short selling damaged WaMu
7/21/08: SEC bans “naked” short selling in certain financial stocks.
Washington Mutual is not included on the list.
http://www.sec.gov/rules/other/2008/34-58166.pdf
http://www.mortgagenewsdaily.com/7222008_Short_Sell_Banks.asp
9/17/08: SEC bans “naked” short selling of all stocks.
http://www.sec.gov/rules/other/2008/34-58572.pdf
9/18/08: SEC bans short selling of 799 financial companies, including
Washington Mutual.
http://www.sec.gov/rules/other/2008/34-58592.pdf
General resource on the surrounding economic legislation and SEC and
FED actions:
http://www.philadelphiafed.org/payment-cards-center/legislative-updat...
Did the FDIC do their job properly after the seizure of Washington
Mutual?
Sheila Bair, in a 60 Minutes episode which aired on March 8, 2009,
said that the FDIC did not shutter big banks. Washington Mutual was a
big bank and the fallout from its seizure was widely felt in the US
markets and indeed around the world. Stockholders were essentially
wiped out in this seizure, due to the fact that the FDIC permitted the
deal to be written with no regard to provisions for the stockholders.
Although it is unknown exactly what the total losses were, it is
estimated it could be as high as $30 billion. Many of these
stockholders were Pension Funds, large institutions, as well as
individuals 401K's, IRA's and other private accounts. The question at
this point is whether the FDIC acted appropriately in only getting 1.9
Billion dollars, and allowing the stockholders to be left out of the
transaction, and completely out in the cold. Many institutions were
severely impacted by the sale agreement the FDIC arranged. The sale
agreement had far reaching, adverse effects both on portfolios and the
market in general.
9-17-08: A WSJ article states that WaMu has hired Goldman Sachs to
find a buyer of the bank.
9-18-08: WaMu's rating slips to a 4 and is placed on the FDIC's watch
list, a fact kept secret at the time to prevent a self-fulfilling run
on the bank. A 4 rating reflects financial, operational or managerial
weaknesses that threaten a bank's financial viability.
9-19-08, Friday: FDIC talks with JPM about WaMu. (From JPM
presentation on 2-26-09)
9-22-08, Monday: FDIC meets with JPM. (From JPM presentation)
9-24-08, Wednesday: 4 banks reportedly submitted bids/plans to FDIC by
the deadline set by the FDIC:
FDIC Chairman Sheila Bair told reporters on Thursday that after an
open process to find a buyer failed, the agency turned to its
secretive auction process in which bidders place their offers on a
secured website. The auction turned out to be not so secret when a
media leak prompted early seizure of the bank. The "leak" has not been
identified.
Which other organizations bid for WaMu, and the contents of those
bids, have not been revealed by the FDIC. Here is an abbreviated
timeline of what happened.
9-24-08, Wednesday 6:44PM: JPM submits bid to FDIC of $1,888M
9-25-08, Thursday: OTS seizes WaMu and gives it to FDIC
9-26-08, Friday: FDIC sells WaMu to JPM for $1,888,000,000.
2-26-09: JPM states that the WaMu transaction was 'very non-
traditional'. (From shareholder presentation).
Did the FDIC do a fair and impartial auction?
Were all banks given the same information at the same time? By some
reports JPMorgan knew of the auction 3 weeks prior. Did other banks
have that same advantage? JPM was notified on Friday, 9-19 that they
would get the bank. That was days before the auction officially began.
Of note, JPMorgan raised approximately $11 Billion for the purchase,
yet they managed to buy the bank for a mere $1.9 Billion. The auction
permitted the banks to bid $0 for the bank, and totally disregard the
stockholders and bondholders. Although stockholders and bondholders
are not technically the FDIC's responsibility, was it wise or fair to
totally disregard the interests of these stakeholders?
FDIC regulations as quoted from their official website:
http://www.fdic.gov/regulations/laws/rules/1000-1220.html#1000sec.11d
12 U.S.C. 1821(d)
13) ADDITIONAL RIGHTS AND DUTIES.--
(E) DISPOSITION OF ASSETS.--
(i) maximizes the net present value return from the sale or
disposition of such assets
(ii) minimizes the amount of any loss realized in the resolution of
cases
(iii) ensures adequate competition and fair and consistent treatment
of offerors
How Did JPMorgan Chase (JPM) Profit from the purchase of WaMu's
banking assets for $1.888 Billion?
JPMORGAN CHASE Acquires the deposits, assets and certain liabilities
of WASHINGTON MUTUAL’S banking operations
http://tinyurl.com/aq3v4w
JPM's Bid For WaMu via FOIA Request
http://wmish.com/docs/gib/JPMorgan_Bid_September_24_2008.pdf
What Did JPM Purchase?
It is still not clear exactly what JPM purchased from the FDIC on
09/25/08, because their Purchase and Assumption agreement didn't
disclose exactly what was sold, other than as stated in paragraph 3.1,
"...all of the assets (real, personal and mixed, wherever located and
however acquired) including all subsidiaries, joint ventures,
partnerships, and any and all other business combinations or
arrangements, whether active, inactive, dissolved or terminated, of
the Failed Bank whether or not reflected on the books of the Failed
Bank as of Bank Closing." This statement clearly did not address the
possibility of joint ownership of assets by Washington Mutual Bank
(WMB) and their holding company, Washington Mutual Inc. (WMI). The
seizure of assets which were not on WMB's books leaves open the real
possibility that some of those assets actually belonged either solely
to WMI or were owned jointly and as such were not rightfully seized.
It appears that that Schedule 3.1a had been intended to be more
specific regarding the assets sold. This section is missing, despite
being referenced repeatedly in the version of the document posted
initially on the FDIC's website.
http://www.fdic.gov/about/freedom/Washington_Mutual_P_and_A.pdf
An early rough draft was obtained by FOIA request:
http://wmish.com/docs/gib/Washington_Mutual_Bank_Closing_Book.pdf
What Did JPM Gain?
JPM had long coveted WaMu's West coast branch network, and had earlier
offered $8 per common share for the entire company, an offer that
would have assumed all debt and preferred stock of both WMB and WMI.
It was rebuffed at the time for being too low; it was less than WMI
common stock's market price at that time.
Through the seizure and acquisition, JPM expanded its' banking
footprint into states with little Chase coverage. These include
Washington, Oregon, California, and Florida. Along with $307B in
assets they acquired $188B in deposits, 2239 branches, 4,932 owned and
branded ATMs, and 43,198 employees.
They were also given the ability to return any branches they didn't
want to the FDIC. JPM has indicated it would lay off 9,200 employees
and recently indicated they would cut another 2,800 positions through
attrition; the cuts total nearly 30% of WaMu's employees. Included in
the purchase price was $1.5B of real estate or other assets (JPM's
10K, 12/31/08, p 82) and WMB's credit card business.
JPM's 10K, 12/31/08
http://www.secinfo.com/dsvr4.s3xf.htm#1stPage
Listed figures are as of 06/30/08 as stated in the OTS fact sheet
below.
http://files.ots.treas.gov/73002.pdf
WMB's credit card business had been expanded on June 6, 2005 with the
purchase of Providian Financial for $6.45B. JPM assumed both the WMB
and Providian credit card subsidiaries along with all other
subsidiaries of the bank. $10.6 Billion in credit card receivables
were included.
http://en.wikipedia.org/wiki/Providian
JPM's Loan Portfolio
JPM stated in their conference call on 09/25/08 that the transaction
would be, "Accretive immediately, 50 cents" (per share), and that it
would result in a "Net cost savings (of) $1.5B, conservatively."
"$176B (of) home loans (were) assumed", with "$30.7B losses
projected."
http://wamucoup.com/JPM_telecon_all.wma
"Just shy of $300B of assets" were assumed, with net assets of $31B
after deducting liabilities. JPM then stated they would mark down $31B
related to the loans. Coincidence? JPM can use those write downs to
offset $31B in profits, resulting in a significant tax savings. At a
35% tax rate, (general business tax rate) this represents a tax
savings of approximately $10.85 Billion.
When asked about loan losses if the economy were to worsen, JPM stated
that even under the pessimistic assumption if the loan losses exceeded
expectations, the worst they would do would be to end up flat. Why?
Due to the fact that the other WMB assets would still be making money.
JPM stated, "This transaction's generating $12B of capital over the
next 3 years.” (That is after taxes.) The WMB acquisition would result
in, a "stable, predictable earnings stream" due to retail customers.
JPMorgan Chase acquired the banking operations of Washington Mutual
Bank for $1.9 billion. The fair value of the net assets acquired
exceeded the purchase price which resulted in negative goodwill. In
accordance with SFAS 141, non-financial assets that are not held-for-
sale were written down against that negative goodwill. (Negative
goodwill is a positive gain on a balance sheet due to gains that
cannot otherwise be accounted for.) The negative goodwill that
remained after writing down non-financial assets was recognized as an
extraordinary gain."
JPM 10K for 12/31/08; p 26, note (d)
http://www.secinfo.com/dsvr4.s3xf.htm#1stPage
“Effective September 25, 2008, JPMorgan Chase acquired the banking
operations of Washington Mutual Bank for $1.9 billion. The fair value
of the net assets acquired exceeded the purchase price which resulted
in negative goodwill. In accordance with SFAS 141, non-financial
assets that are not held-for-sale were written down against that
negative goodwill. The negative goodwill that remained after writing
down non-financial assets was recognized as an extraordinary gain in
2008.”
After writing down part of the negative goodwill, JPM recognized an
extraordinary gain of $1.9B. Without this extraordinary gain due to
Washington Mutual, JPM would have reported a loss for the quarter.
FDIC accounting report on receivership detailing assets transferred
http://wmish.com/docs/WaMuReceivershipFinancialStatements(unaudited)t...
JPMorgans hedge fund was amazingly unscathed by the economic turmoil.
Good trading sense or is there more to it?
http://www.huffingtonpost.com/2009/03/03/jpmorgan-derivatives-5-bi_n_...
So to sum it up, JPMorgan Chase acquired a massive branch and credit
card network that augmented their footprint in areas where they were
weak. For $1.9B, they acquired 2,239 branches in lucrative markets
that would have cost many billions to construct themselves. They
obtained an immediate $1.9B financial gain on the transaction, have a
future tax savings of $10.85 Billion, and expect to make an additional
$12 Billion in after tax profit over the next three years. And after
that they are left with a profitable bank that will continue to
generate billions of dollars of profits every year for the foreseeable
future.
The question remains. Was this a fair auction? Did government
regulators do their jobs properly? Was Washington Mutual fairly
compensated for its bank?
Should Washington Mutual have been seized at all?
You be the judge.
Latest Developments and Links:
1. JP Morgan responsible for destruction of financial system:
http://www.marketoracle.co.uk/Article6826.html
2. WSJ FDIC memorandum:
http://online.wsj.com/public/resources/documents/wamu_memo.pdf
3. Geithner, Paulson named in $200 billion lawsuit
http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=94539
4. -WAMU was in a lot worse shape in 2007:
http://wmish.com/docs/var/CAPITAL%20AND%20PROMPT%20CORRECTIVE%20ACTIO...
5. Feds say WAMU WAS the cause of collapse:
http://www.newyorkfed.org/research/conference/2009/cblt/interbank_mar...
7. JPM Shareholder Pamphlet::
http://tinyurl.com/cj9a3w
8. WMI Documents:
http://www.mediafire.com/wmi
9. Battle Brewing over Fire Sale of WaMu Banking Assets:
http://tinyurl.com/cz2soy
10 JPM Lawsuit against WMI:
http://amlawdaily.typepad.com/jp.pdf
11. NY Times Slams the OTS:
http://www.nytimes.com/2009/04/09/business/09views.html
On Jul 10, 2:28 am, matt <m...@matthewmurphy.net> wrote:
> On Jul 3, 5:53 pm, PP Y <papaya2
...@gmail.com> wrote:
> > Why is FDIC not being held accountable for its failure in supervision
> > but praised for its efficiency in shutting down banks? Why is FDIC
> > practically using our tax money to share losses and wiping out
> > shareholders because it failed its job to supervise properly?
> > "Regulators shut down the John Warner Bank of Clinton, Ill.; the First
> > State Bank of Winchester in Winchester, Ill.; the Rock River Bank of
> > Oregon, Ill.; the Elizabeth State Bank of Elizabeth, Ill.; the First
> > National Bank of Danville in Danville, Ill.; the Founders Bank of
> > Worth, Ill.; and Millennium State Bank of Texas, based in Dallas."http://www.nytimes.com/2009/07/03/business/03banks.html?ref=business
> > "The FDIC and The First National Bank of Beardstown entered into a
> > loss-share transaction on approximately $20 million of The First State
> > Bank of Winchester's assets."http://www.istockanalyst.com/article/viewiStockNews/articleid/3330752
> > All these banks except for First National Bank fell under FDIC
> > supervision (Class NM)
> > *NM = commercial bank, state charter and Fed nonmember, supervised by
> > the FDIC*http://www2.fdic.gov/idasp/main.asp
> The FDIC is only the *backup* regulator for state-chartered Federal
> Reserve Nonmember (NM) banks. It generally cannot take direct action
> against a state-chartered institution except in the most egregious of
> circumstances, or in the case of direct violation of one of the FDIC-
> enforced consumer protection laws (i.e., the FTC Act).
> > This is the first page of the latest failed bank list on the FDIC
> > website; 11 out of 20 were under its supervision.http://www.fdic.gov/bank/individual/failed/banklist.html
> > Mirae Bank (NM) June 26, 2009
> > MetroPacific Bank (NM)
> > Horizon Bank (NM)
> > Neighborhood Community Bank
> > Community Bank of West Georgia
> > First National Bank of Anthony
> > Cooperative Bank (NM)
> > Southern Community Bank (NM)
> > Bank of Lincolnwood (NM)
> > Citizens National Bank
> > Strategic Capital Bank (NM)
> > BankUnited, FSB
> > Westsound Bank (NM)
> > America West Bank (NM)
> > Citizens Community Bank (NM)
> > Silverton Bank, NA
> > First Bank of Idaho
> > First Bank of Beverly Hills (NM)
> > Michigan Heritage Bank
> > American Southern Bank (NM) April 24, 2009
> The overwhelming majority of our nation's banks are state-chartered
> Fed nonmember banks. Even if 70% of failures fell under the NM
> classification, that would be relatively low given the overall
> prevalence of the NM charter class in the market. By far the largest
> failure and assistance liabilities for the FDIC (the five Citigroup-
> linked banks/thrifts, Bank of America, IndyMac, BankUnited, ...) were
> all either national banks regulated by OCC, or thrifts regulated by
> OTS. The state regulators have actually done a far better job than
> OTS, OCC, etc., at enforcing the capital rules.
> > Why would anyone want to buy any bank? As long as our regulators don't
> > follow rules nobody would want to deal with the government. Sheila
> > Bair now says these private investors must maintain a tier I capital
> > ratio of at least 15% but back when Wamu had a tier I capital ratio of
> > 8.4% (yes not as high as 15% but a pretty good number at that time)
> > she still seized it.
> The FDIC does not seize banks, nor decide which ones are open and
> which ones are closed. The FDIC can only accept or decline
> appointment as receiver for banks that have already been closed by
> their primary regulator. The agency that closed WaMu was the Office
> of Thrift Supervision, not the FDIC.
> Furthermore, the chief objective of the banking regulators is *NOT* to
> minimize the number of failures, but rather to minimize the total cost
> to the DIF (and therefore the risk to the credit of the United
> States). WaMu was closed not because its capital was insufficient,
> but because it was losing deposits at such a rate that its capital
> would have *become* insufficient in a matter of days. With WaMu
> losing $10 billion a month in deposit base and the run accelerating as
> the damage was tallied, OTS recognized that the bank had lost
> depositor confidence and would run out of capital, causing a huge loss
> to the Deposit Insurance Fund. WaMu, rather than being simply
> undercapitalized, was operating in an "unsound condition", hence its
> closure.
> > "The FDIC today released a memorandum designed to provide guidlines to
> > private equity firms looking to own banks. A summary is (emphasis
> > mine):
> > Pursuant to the proposed policy statement, the Investors’ holding
> > company will be expected to provide for the capital support of the
> > acquired or de novo depository institution through a strong initial
> > capital contribution – maintaining a minimum 15 percent Tier 1
> > leverage ratio for a period of at least 3 years. Staff believes that
> > up-front capital protection for the depository institution would
> > provide an effective cushion that could have a lasting impact...
> > Now, some might recall that banks were judged on their Tier 1 ratio
> > once upon a time. Regulators then swung to tangible common equity and
> > settled into tangible capital. But now that the danger has passed and
> > all is better (right?), the FDIC swings back to tier 1 and well
> > capitalized (recall that WaMu and WB were "well capitalized when they
> > were defacto siezed)."http://seekingalpha.com/instablog/153397-boneyard/11078-fdic-shepardi...
> WB was never actually seized; OCC didn't close the bank, nor did it
> place it in conservatorship. The FDIC had a plan for an Open Bank
> Assistance & Acquisition (A/A) transaction with Citigroup, but it
> deliberately allowed Wachovia to remain open. Wachovia ended up being
> bought in an unassisted sale by Wells Fargo and Co., hence no federal
> intervention.
> As noted above, WaMu was closed because of a crippling ($300 million
> per day) deposit run, not a capital problem.
> > FDIC now has the power to borrow up to $500 billion, and is that not
> > tax money?
> The FDIC borrowing authority is only $100 billion, not $500 billion.
> Chris Dodd proposed the $500 billion number when the health of
> Citigroup, Bank of America, et al. was in question, but it didn't end
> up going that high in the final legislation.
> Treasury borrowing is in fact borrowing tax dollars. However, the
> FDIC must not only pay back the principal of what it borrows, but also
> the interest (i.e., the borrowing cost). The taxpayer doesn't
> actually lose anything by way of the FDIC's borrowing, which is what
> happened when the FDIC borrowed money for the RTC's wind down in 1991.
> > Bair's original proposal was to collect only $27 billion
> > from special assessment fees this year so how long do you think it
> > will take FDIC to pay back whatever it borrows? Its DIF ratio
> > continues to plummet; as of last quarter, it was at 0.27%. That means
> > for every $100 you deposit you can really only get $0.27 back.
> I don't think you understand how insurance systems work. The idea is
> that you take money from all the banks, and insure them all against
> failure. You can't collect a dollar for every dollar of deposits, or
> you'd have no deposits. So, what you do is, you collect the statutory
> 1.5% of those deposits and then you basically pray that the banks that
> fail at any one time hold less than 1.5% of deposits. Typically, it's
> actually a sane bet, as large banks are unlikely to be allowed to fail
> and even small banks don't routinely fail.
> Even in a good environment, when the DIF is at its statutory maximum
> and the banks pay nothing for deposit insurance, only $1.50 per $100
> of deposits is backed by actual cash in the insurance fund.
> > Wait, did I forget to mention FDIC is also backing over $300 billion
> > of bank bonds for Goldman Sachs etc?
> TLGP backing is virtually risk free for the FDIC; the odds that a
> large bank like Goldman Sachs would:
> A) fail; and
> B) not be rescued by the Federal Reserve's printing press
> are essentially zero, as most of the big banks have been explicitly
> labeled too big to fail.
> Also, the FDIC is paid a fee for its guarantee, just as it is for
> deposit insurance.
> > Its great GS is paying back TARP
> > but why should it give out record bonus this year when the US
> > government is still backing its bonds?
> TLGP backing of banks' debt is due to end in a few months. One of the
> conditions for exiting TARP (and therefore paying unregulated bonuses)
> was that the bank issue unbacked debt without an FDIC guarantee. Once
> the FDIC guarantees on existing debt expire at maturity, the bank will
> have been completely re-privatized.- Hide quoted text -
> - Show quoted text -- Hide quoted text -
> - Show quoted text -- Hide quoted text -
> - Show quoted text -
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