WAMU: Largest Bank Failure in American History

The crisis continues regardless of what the politicians are doing.

Washington Mutual, the giant lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators on Thursday night in what is by far the largest bank failure in American history.

Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual to J.P. Morgan Chase. The remainder of WaMu, the nation's largest savings and loan, will be operated by the government. Shareholders and some bondholders will be wiped out. WaMu depositors are guaranteed by the Federal Deposit Insurance Corp. up to the $100,000 per account limit. WaMu customers are unlikely to be affected.

J.P. Morgan Chase is to take control Friday of all of WaMu's 2,300 branches, which stretch from New York to California, and will oversee its big portfolio of mortgage and credit card loans. It will also acquire all of WaMu's deposits with the sale.

For weeks, the Federal Reserve and the Treasury Department had been nervous about the fate of WaMu, among the worst-hit by the housing crisis, and pressed hard for the bank to sell itself. As panic gripped financial markets last week following the collapse of Lehman Brothers, the government stepped up its efforts, working behind the scenes, and at points going behind WaMu's back to work privately with potential bidders on a deal.

The seizure and the deal with J.P. Morgan came as a shock to Washington Mutual's board, which was kept in the dark: the company's newly-minted chief executive, Alan C. Fishman, was in flying from New York to Seattle at the time the deal was finally brokered, according to these people.

The action removes one of America's most troubled banks from the financial landscape, and helps to avoid sticking taxpayers with a huge bill for the rescue of another failing institution.

As with Lehman Bros., the government allowed Washington Mutual to fail because it was less entangled with the rest of the financial system than a behemoth like American International Group Inc., which the government spent $85 billion to take over last week while it faced collapse. On Sunday, the government approved emergency measures to help stabilize Goldman Sachs and Morgan Stanley.

Federal regulators had been trying to broker a deal for Washington Mutual because a takeover by the Federal Deposit Insurance Corp. would have dealt a crushing blow to the federal government's deposit insurance fund. The fund, which stood at 45.2 billion at the end of June, has been severely depleted from the sudden collapse of IndyMac Bank. Analysts say that a failure of Washington Mutual would cost the fund upwards of $20 or $30 billion.

There are other major banks facing crisis.

Global bank HSBC Holdings (HSBA.L) is cutting 1,100 jobs in its investment banking operation, or 4 percent of the unit's total, as it weathers the global financial crisis.

[...]The cuts add to more than 80,000 job losses across the banking landscape in the past 18 months as the worst financial crisis since the Great Depression deepens. It has caused unprecedented change on Wall Street and the demise of venerable firms such as Bear Stearns and Lehman Brothers (LEHMQ.PK).

[...]In August, the bank posted a 28 percent fall in first-half pretax profit to $10.2 billion as it took a $14 billion hit from bad debts on U.S. home loans and asset writedowns.

Meanwhile the politicians fiddle.

What began as high-stakes negotiations over the proposed $700 billion bailout of the nation's financial system dissolved into bickering, begging and a roiling battle between parties Thursday night.

One day after President Bush said the nation's economy is at grave risk, lawmakers argued over competing counterproposals and wound up without any apparent financial bailout deal on the table.

Even Treasury Secretary Henry Paulson got down on one knee to half-jokingly beg Speaker Nancy Pelosi and other Democratic leaders not to go to the television cameras and blast the failed negotiations, according to two senior Democratic aides.

Sens. John McCain and Barack Obama left a White House meeting, described as at times "contentious," having made no progress toward a resolution.

Obama, appearing on CNN's "The Situation Room" afterward, said there "has to be a sense of urgency on the part of everybody. ... We've got to move rapidly."

Obama said a deal will come eventually, but there is still work to do, including reaching a consensus among Bush, Paulson and House Republicans.

Shortly after 10 p.m., Rep. Barney Frank, D-Mass., the lead House Democrat on the issue who had been in close talks with Paulson for days, accused Republicans of refusing to negotiate, CNNMoney.com reported.

"At this point, we have absolutely no participation or cooperation from House Republicans," Frank said.

McCain told ABC News on Thursday night that Republicans "have legit concerns. Some of those have already been satisfied, such as accountability and oversight board and CEO executive pay. Members are aware of the crisis situation that we are in."

However, McCain said, "They do have concerns, which I think when you're talking about $700 billion to a trillion dollars, that need to be addressed."

Obama, who spent Thursday night in Washington, once again railed against infusing presidential politics into the negotiations over the $700 billion economic bailout. McCain's campaign said he also stayed in the Washington area for the night.

"One of the concerns I've had over the last several days is that when you start injecting presidential politics into delicate negotiations," Obama said, "then you can actually create more problems rather than less."

Democratic sources said that House Minority Leader John Boehner, R-Ohio, threw a wrench into the meeting when he brought up issues from conservative Republicans that negotiators thought had been settled.