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Question about WaMu vs. Wachovia


John Adams

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Both the WaMu and Wachovia buyouts were brokered by the government. Wachovia's deal was brokered (with some caps on losses) before Wachovia failed. Wamu was allowed to fail before the deal was final--in fact, the deal couldn't be final until it failed. Why were there 2 such different approaches? I haven't read about this anywhere and figure there must be a reason.

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Preemptive plumbing

 

"Believe it or not, there was some good news in financial markets yesterday. We're referring to Citigroup's $2.2 billion Monday morning takeover of Wachovia, which is one more sign that regulators are finally starting to get out in front of the problems.

 

The Wachovia takeover was what regulators call an "open bank" transaction, the first in the current panic. In other words, the regulators didn't wait around for the bank to fail before swooping in and picking up the pieces. Instead, they acted creatively and in concert with a private buyer to remove an ailing bank while minimizing the collateral damage and taxpayer exposure."

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Both the WaMu and Wachovia buyouts were brokered by the government. Wachovia's deal was brokered (with some caps on losses) before Wachovia failed. Wamu was allowed to fail before the deal was final--in fact, the deal couldn't be final until it failed. Why were there 2 such different approaches? I haven't read about this anywhere and figure there must be a reason.

 

 

Fantastic question. If you want a bit more detail...

 

JPMorgan Chase & Co., through its lead bank subsidiary JPMorgan Chase Bank, National Association, acquired all of the deposits, assets and certain liabilities of Washington Mutual, Inc.'s banking operations from the Federal Deposit Insurance Corporation (FDIC) immediately after the Office of Thrift Supervision closed Washington Mutual's lead thrift, and appointed the FDIC as receiver. Washington Mutual's closure marked the largest bank failure in U.S. history.

 

As part of the transaction, JPMorgan Chase made a payment of approximately US$ 1.9 billion to the FDIC. The acquisition included the assumption by JPMorgan Chase of US$ 182 billion in deposits, and extended its retail branch network to six additional states. The combined operations include 5,400 branches, and deposits of US$ 900 billion.

 

Now, contrast the WaMu deal with the Wachovia transaction. The transaction involves the purchase by Citigroup of the banking operations of Wachovia, and the assumption of the senior and subordinated debt securities (including trust preferred) of Wachovia, and the payment to Wachovia of a cash price of US$ 2.2 billion. Wachovia's holding company would continue in existence, controlling the brokerage (Wachovia Securities), asset management (Evergreen) and insurance businesses. Wachovia's common and preferred shareholders would own the continuing company.

 

By contrast with the Washington Mutual situation, Wachovia is not a failed bank deal — meaning that Wachovia's bank subsidiaries were not closed and no receiverships were involved. Further, all the debt securities of Wachovia and its bank subsidiaries were protected. The transaction does involve a loss protection arrangement in which the FDIC would absorb losses on a US$ 312 billion portion of Wachovia's loan portfolio, including a US$ 122 billion option ARM mortgage portfolio.

 

The real "why," I suspect, is management. WaMu was still trying to stay independent and, in fact, did not know that OTS had stepped in until the very last minute. Wachovia knew a deal had to get done and worked with the regulators.

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I read that this morning and it's one of the things that prompted the question. The WaMu deal was totally ready so that the second it failed, the deal went through--all brokered by the Fed. Why, if the Fed was in the middle of both deals, were they handled so differently?

 

My guess is that FDIC didn't have the extraordinary authority under the 1991 FDICIA statute for WaMu, and got it for Wachovia.

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Fantastic question. If you want a bit more detail...

...

 

The real "why," I suspect, is management. WaMu was still trying to stay independent and, in fact, did not know that OTS had stepped in until the very last minute. Wachovia knew a deal had to get done and worked with the regulators.

 

I am not sure the differences in the deal (where I put the ellipses) really tell the "why" of the different deals. But this last bit makes some sense. WaMu was holding on until it was too late where Wachovia was proactive. Thus it wasn't the government that made the deals different--it was bank management.

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I read that this morning and it's one of the things that prompted the question. The WaMu deal was totally ready so that the second it failed, the deal went through--all brokered by the Fed. Why, if the Fed was in the middle of both deals, were they handled so differently?

Actually, I believe it was Sheila Bair and the FDIC that brokered the deals.

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