WaMu's desperate last days

An old-fashioned run on the bank — conducted electronically rather than with customers lined up around the block — was the final blow that brought Washington Mutual's 119-year history to an ignominious end.

But leading up to Thursday's seizure of the Seattle-based thrift — the largest bank failure in U.S. history — were three weeks of feverish behind-the-scenes maneuvering, as players with conflicting agendas circled over the reeling but still potentially valuable company.

Federal regulators wanted to avoid a collapse that would severely strain the nation's deposit-insurance system. The big-name investors who'd pumped billions into WaMu just months ago sought to salvage something from their ill-timed intervention. And the half-dozen banks hovering over WaMu saw a grand opportunity but wanted to pay as little as possible.

Before it was over, regulators would hold a secret auction behind the backs of WaMu management and seal a deal the company was powerless to oppose.

Regulators and insiders paint a picture of a deeply troubled bank that only reluctantly put itself up for sale, though they dispute how close it was to failing.

WaMu failed in much the same way that Michael Campbell, a character in Hemingway's "The Sun Also Rises," said he went bankrupt: "Gradually, and then suddenly."

WaMu had long been considered among the banks most at risk from the nationwide housing slump, because of its heavy exposure to subprime mortgages and other risky home loans. As early as February, federal regulators had cut their risk rating on WaMu, indicating their concern.

As WaMu's stock fell below $10 last spring, investors led by savvy private-equity firm TPG infused $7.2 billion in new capital, getting more than half the company at what was then the discount price of $8.75 a share.

By July, as WaMu's half-year losses mounted to $4.5 billion, the board decided longtime CEO Kerry Killinger had to go, and quickly.

"After second-quarter earnings, it was clear Killinger wasn't going to have any credibility with investors or regulators," said a person close to the board, who spoke only on condition he not be identified. "He didn't seem as concerned as he should have been."

In early September, the board hired Alan Fishman, a veteran banking executive from New York, with a mandate to get WaMu turned around and then, once the crisis had passed, look for a buyer.

But federal regulators were moving much more swiftly. By Sept. 8, Fishman's first official day on the job, the Office of Thrift Supervision (OTS) had tightened its oversight of WaMu's risk-management and compliance operations and required it to submit a detailed multiyear business plan.

Morningstar analyst Jaime Peters said at the time it was the first overt sign that OTS was seriously worried about WaMu's health.

Regulators also were pressuring WaMu to either raise new capital or find a buyer — fast.

They had good reason to be concerned. Outside analysts estimated a WaMu failure could cost the Federal Deposit Insurance Corp. (FDIC) as much as $24 billion; with other big banks teetering, the agency wanted to minimize the hits to its $45.2 billion insurance fund.

Depositors had been pulling funds from the Seattle-based thrift for months, but the pace accelerated sharply two weeks ago, OTS officials said.

The biggest withdrawals, they said, came from retail depositors — ordinary, longtime customers, not the "hot money" managed by brokers seeking high rates that often is blamed for destabilizing banks.

As fears grew that the nation's financial system was veering toward chaos, WaMu customers withdrew $16.7 billion in deposits between Sept. 15 and 24. Most of those outflows were in California, and most were from accounts that exceeded the $100,000 federal deposit-insurance cap, said Scott Polakoff, the OTS' senior deputy director.

Regulators said they feared that if WaMu kept losing deposits at that rate, it would run out of cash to carry on normal business operations — what bankers refer to as "liquidity."

"It was a liquidity crisis, not a capital crisis," Polakoff said in a conference call Friday morning.

By Sept. 11, at WaMu's direction, Goldman Sachs began actively marketing the thrift. All sorts of transactions were being considered, from finding new investors, to selling off pieces of the company, to a complete sale.

"Anything you could think of that the regulators would go for was on the table," said the person familiar with board members' thinking. "Even in the waning days, we were looking at stand-alone, capital-infusion scenarios."

Besides JPMorgan Chase, banks that looked over WaMu included Citigroup, Wells Fargo, HSBC, Spain's Banco Santander and Canada's TD Bank. Several private-equity firms and a few sovereign-wealth funds also were approached, the person said.

But no one made a formal offer for the whole company. JPMorgan, the ultimate buyer, was willing to take on the distressed mortgage portfolio but not its obligations to bondholders and shareholders.

"There was no price at which a deal for the whole company would have made sense to us," Charles Scharf, JPMorgan's head of retail banking, said Friday in a conference call.

OTS Director John Reich insisted his agency kept in close contact with both WaMu management and potential buyers: "It was a full-time effort the last several weeks to do everything possible to keep the institution alive."

But the person close to WaMu's board accused the OTS and FDIC of hindering WaMu's own efforts.

"They were running on a second track," he said. "They were telling us, 'Do this, do that, look for capital, look for a buyer,' and at the same time they were feeling people out."

Spokesmen for the agencies declined to respond to those contentions Saturday.

Another complicating factor was the prospect of a big federal bailout package for the financial sector, formally proposed on Sept. 19 but widely rumored earlier. If WaMu, or an acquirer, were able to offload some of the most toxic mortgage debt to the government, that could make a deal pricier but safer.

"If you were a buyer, why would you do anything before the government passes that bill?" the source said.

Reich agreed that the bailout proposal was "at the least, a significant distraction, and probably played a role in the [decision] of some parties not to make a bid."

In any event, time was rapidly running out. On Sept. 15, Standard & Poor's cut WaMu's credit rating to junk-bond status. On Sept. 18, the OTS cut its risk rating on WaMu again, classifying it as a troubled bank.

With no buyers or investors coming forward, WaMu tried one more option to stay afloat. Early last week it approached the Federal Reserve and the Federal Home Loan Banks (FHLB), asking for exceptions to their usual borrowing rules.

If the Fed and FHLB were willing to accept lower-grade collateral, WaMu hoped, it could borrow enough cash to stay afloat longer.

But by then, regulators were ready to pull the trigger. The FDIC put out the word to potential bidders that a seizure of WaMu's banking operations was imminent, set up a secure Web site where interested parties could examine detailed financial data, and set a Wednesday deadline for bids.

As is standard, WaMu management was not told of the agency's intentions.

Four companies bid. Thursday morning, according to The New York Times, FDIC Chairwoman Sheila Bair called JPMorgan CEO Jamie Dimon to tell him his $1.9 billion bid had won.

There was one more complication. FDIC spokesman David Barr said the agency had planned to announce the seizure and sale after the close of business Friday, its usual practice. But word began leaking out Thursday afternoon, and the announcement was hurriedly moved to that evening. (Barr denied speculation that the unusual timing of the announcement was to influence the bailout negotiations.)

At about 6 p.m. Pacific time, Polakoff and other OTS officials called WaMu board Chairman Stephen Frank to tell him the bank was being taken over. Fishman, who was flying back to Seattle from New York, was told soon after.

Minutes later, JPMorgan executives announced the deal on an unusually late conference call.

The WaMu source said many in the company and among its investors believe WaMu could have righted itself, or at least struggled on for a few more months, had regulators shown some forbearance. The lost billions in deposits might well have returned once the financial crisis abated, he said.

"At the end of the day," he said, "we simply ran out of time."

But Reich, Bair and other officials insisted that WaMu's cash position was deteriorating so quickly, and its options disappearing so relentlessly, that the only responsible thing to do was to shut it down.

"These events show the enormous toll that the economic crisis has taken on our nation's housing sector," Reich said. "The core business of WaMu was making home mortgages, and that business has been hit hard — hard enough, as it turns out, to topple a giant."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com