Washington Mutual Is Served Up To JP Morgan

With blood still on its hands from the death of Bear Stearns, JP Morgan attacked Washington Mutual. Morgan camouflaged the takedown as a bailout Bear, but it was really a sellout.  With its stock trading around $8 per share, WaMu still had legs to outrun Morgan, but that sprint came to a halt earlier this month. In close succession, WaMu ran out of options, fired CEO Kerry Killinger, put itself up for sale and waited.  

But here’s some news. So did JP Morgan! Morgan’s bailout camouflage worked even better this time.

Obviously, this is a bankruptcy as much as a takeover by JP Morgan. Will it be seen as such by the Credit Default Swaps market? JP Morgan Chase is only buying the deposit-taking subsidiary. I imagine the Credit Default Swap exposure is for the holding company, which is now effectively bankrupt. This is a very important point because my understanding is that all litigation – including class-action lawsuits – should rest with the Washington Mutual holding company were the common shares and subordinated preference shares sit. The only residual litigation risk that JP Morgan is taking on comes from individual lawsuits that mortgage customers might file.

Will it be seen as such by the Credit Default Swaps market? Short answer is yes probably, the credit markets unlike investment banks only get paid to be right. Meanwhile with the Street giddy over the fact that JP Morgan is getting all of WaMu’s deposits and none of it’s liabilities, JP Morgan went and raised $40B for the buyout. Of course they did this the same way most of us reach for a midnight snack from the refrigerator.

New York-based JPMorgan said today it sold $10 billion of shares at $40.50 apiece. The bank rose 33 cents, or 0.8 percent, to $43.79 in composite trading at 10 a.m.

JPMorgan won’t acquire WaMu’s liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy.

“This is one of the reasons I own JPMorgan: They’re going to win from all this,” Schutz said. “They’re taking on credit risk, but they’re not taking on any debt obligations.”

As the pace of monopolizing the banking market quickens, JP Morgan has now become the largest bank by deposits and is gaining presence in its new role as acquirer of last resort.

JPMorgan Chase & Co. (JPM) priced the capital raising related to its deal to buy the bulk of Washington Mutual Inc.’s (WM) operations and will sell $10 billion in stock – $2 billion more than expected.

The deal will vault JPMorgan into first place in nationwide deposits and greatly expand its franchise. It represents JPMorgan’s second rescue as a buyer of last resort this year. In March, it agreed to buy Bear Stearns Cos., getting a $29 billion backstop from the federal government.

In fact JP Morgan gained a little more: revenge. Witness:

It looks like JP Morgan is the appointed one as the body of Bear Stearns was still warm when Morgan pounced on Washington Mutual. But WaMu was a beast of a different kind, and aided by other suitors escaped.  Morgan was outraged:

J.P. Morgan executives were reportedly furious that WaMu had rebuffed the advance and immediately cut off negotiations, the Journal reported.

JP Morgan’s CEO, James Diamond, sits on the Federal Reserve’s board of governors. That is the same Federal Reserve that is partly owned by Treasury Secretary Paulson’s favorite firm, Goldman Sachs. A slight to one of the privileged elite can have quick and ugly consequences as Washington Mutual and Wachovia both found out. Is there any wonder now why these two were not on the list of firms protected from short sellers? Henry Paulson was very direct.

In WaMu’s case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts of WaMu. Twenty-four hours later, they were already preparing to seize the bank. Earlier this month,Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal J.P. Morgan had offered earlier this year, according to a person close to WaMu.

That says it all.

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