Washington Mutual

CONTENT
• Brief history of WaMu
• Its business model
• Describe the key events from the very history
• What was the crisis? Describe
• Impact of bank’s acquisition of Long Beach Financial in 1999,
and Providian in 2005
• The effect and dependency of FHLB funding
• Characterize the deteriorating effect on earnings
• Identify the events of 2007/8 which contributed significantly
• Who was primarily responsible for the crisis?
• What was the dollar impact of the crisis?
• How was the crisis resolved?
• What was the learning of the crisis?
• What were the steps taken?
• What is the present state? 2
 History Of Wa Mu
• The Washington National Building Loan and Investment
Association
• Founded in 1889
• third-largest savings and loan in the United States
• Its subsidiaries:
• Washington Mutual Bank
• federal savings bank
• Washington Mutual Life Insurance Company
• Murphey Favre Inc.
• On June 25, 1908, the company changed its name to
Washington Savings and Loan Association.
• In 1917, when the country’s focus was on World War I, the
company converted to a mutual savings bank changing its
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name to WaMu.
Business Model

Washington Mutual Inc.

Washington federal savings Life Insurance Murphey Favre

Mutual Bank bank Company Inc.

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 The key events from the very history

• Washington Mutual expanded its assets during World War I by

68 percent.
• WaMu installed its first computer, an IBM 1401 the size of a
refrigerator with 4k of memory.
• The bank converted from a mutual form of ownership to a
capital stock savings bank on March 11, 1983.
• From 1990 to 1996, WaMu acquired 16 smaller banks in
Washington, Oregon, Utah and California.
• WaMu company bought subprime lender Long Beach
Financial in 1999.
• WaMu purchased the formerly "subprime" credit card issuer
Providian for approximately $6.5 billion in October 2005. 5
Cont….
• WaMu was beginning to shrink in terms of total assets by
the end of 2005.
• WaMu began the move into its new headquarters, WaMu
Center, located in downtown Seattle.
• By August 2006, WaMu began using the official
abbreviation of “WaMu” in its branding and all but legal
situations.
• WaMu had four operating segments for management
reporting purposes, by 2007 :-
• the Retail Banking Group
• the Card Services Group
• the Commercial Group
• the Home Loans Group
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 What was the crisis ?
• Nothing was done by the Fed to address the
deteriorating credit conditions inside mortgage
lenders for more than a year.
• Defaults and delinquencies were rising across
all classes of mortgages, that started the ripple
effect that caused the collapse of New
Century.
• New Century Financial create an
earthquake in the mortgage securities market.

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 Impact of bank’s acquisition
• Long Beach Financial in 1999
• writes mortgages for people with less‐than‐stellar
credit.
• one of the more dubious lenders in the CA market
• poor lending criteria.
• credit diligence went out the window
• Providian in Oct. 2005
• credit card unit's non‐performing loan portfolio had
improved significantly.
• WaMu was beginning to shrink in terms of total assets
by the end of 2005.
• the bank already was beginning to feel increased stress
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from its credit book.
The effect and dependency of FHLB
funding

• 20 % of its deposits consists of FHLB

• Consists of poor quality of assets
• WaMu owed $82.9 billion to the FHLB
• It held as assets of $118.9 billion in
single-family loans
• It had non-performing assets of $11.6
billion
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 Characterize the deteriorating effect on
earnings

• Earnings decreased multi foldedly

• Interest delinquencies & defaults.

• Misrepresentations of assets.

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 Identify the events of
2007/8 which
contributed significantly

• Financial crisis broke

out in September
2008(Sub Prime crisis)
• Closing 160 of its 336 home-loan offices and removing
2,600 positions in its home-loan staff
• Rejected JPMorgan Chase's offer that valued WaMu at
$8 a share, mostly in stock.
• Stated its intent to close its approximately 186 remaining
stand-alone, announced a $7 billion infusion of new
capital. 11
•  Alan H. Fishman replaced Kerry Killinger as a CEO.
 Who was primarily responsible for the
crisis?
• Decline in public confidence in large financial institutions……!

• Killinger's goal was to build WaMu into the “Wal-Mart of Banking,”

• Complex mortgages terms were easy for the least creditworthy

borrowers
• The option ARM was "like the neutron bomb”

• (lacked the proper knowledge to interpret their mortgages and were

locked into contracts)

• “It was a late entry into the subprime market as a way to juice the
oncefast‐growing company’s sluggish earnings” The Wall Street 12
Journal
•  liquidity failure at WaMu was induced by the
decline in public confidence in large financial
institutions

• WaMu's large mortgage holdings in California

and Florida, two states hit by the largest price
declines after the housing bubble burst.

• Federal law that requires savings and loans to

invest two-thirds of its assets in real-estate.

• "Had WaMu's liquidity crisis occurred two weeks

later, there would have been no failure," Reich13
What was the dollar impact of the crisis?

•  Failure of the United States largest bank

• With dollar liquidity shrinking(Treasury announced

it would issue $100 billion in new debt)

• Increased interest payout

• Resulted in a 700 billion dollar bail out.

• Dollar depreciation

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• Precious Metals prices were smashed out
How was the crisis resolved?
• WaMu's share price had closed as low as $2.00 as
compared to high as $45.00
•  Federal Reserve and the Treasury Department to
step up pressure on WaMu
• Wa Mu assets (all branches, Deposit liabilities and
secured debts) purchased by JPMorgan Chase. for
$1.9 billion
• Stockholders were nearly wiped out
• WaMu sued the Federal Deposit Insurance
Corporation (FDIC) for US$ 13 billion.
• illegal seizure of WM assets and deposits and
the complete destruction of shareholder equity
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What was the learning of the crisis?

• The option ARM is a nuclear bomb.

• Never Give Credit without Collateral.
• Don’t keep low lending standards by giving sub prime
loan.
• Don’t be aggressive lenders in the mortgage industry
• Company growth should not be based on an unstable
liabilities
• Avoid Bad quality acquisitions, don’t acquire Company
with poor quality of its assets.

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What is the present state?

• Washington Mutual Bank branches will be renamed

to Chase or will be shuttered.
• WaMu credit and debit cards will also carry the
Chase logo.
• Most branches doesn’t exist now, as been taken
over by J P Morgan Chase.
• It has been delisted from stock exchange

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THANK YOU

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