WaMu's Failure: Why It's Unusual, What's Next

JPMorgan's purchase of Washington Mutual is surprising for three reasons. And what should investors do now?
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Last night's failure of

Washington Mutual

(WM) - Get Report

was a surprise in three respects.

First,

JPMorgan Chase

(JPM) - Get Report

acquired all of the failed thrift's branches deposits, including balances exceeding FDIC insurance limits. With so much in the way of option-payment adjustable-rate mortgages and other low-quality mortgage loans on the books, it's a bit of a miracle for the FDIC's insurance fund that JPMorgan paid $1.9 billion for all of Washington Mutual's branches, deposits and loans.

JPMorgan announced it would write down the acquired loans by about $30 billion and raise $10 billion in new capital by offering 246.9 million shares of common stock at a price of $40.50. JPMorgan shares were trading at $44.02 early Friday afternoon.

Washington Mutual had projected losses of $19 billion on its mortgage portfolio. JPMorgan's move to take its lumps right now will hopefully wipe the slate clean and allow the New York holding company to greatly expand its presence in key states, including California and Florida.

Second, Washington Mutual and its regulator, the Office of Thrift Supervision, were able to keep the thrift's $16.7 billion run on deposits off the front pages for nearly two weeks -- even with the failure of

Lehman Brothers

(partially acquired by

Barclays PLC

(BCS) - Get Report

) and ratings downgrades of Washington Mutual's debt deeper into junk status.

Third, the Office of Thrift Supervision closed WaMu on a Thursday night. All other 2008 bank failures have been announced on Friday nights, allowing a weekend for transition of branch operations to acquiring institutions.

Liquidity the Last Nail in the Coffin

In August 2007, TheStreet.com was early in pointing out how WaMu's poor

asset quality

threatened its earnings and capital, and reliance on deposits with balances exceeding FDIC insurance limits threatened the thrift's liquidity.

Earlier in September, Washington Mutual was paying some of the highest rates in the country for

CD deposits

, along with other troubled institutions, such as BankUnited, FSB, held by

BankUnited Financial

(BKUNA)

,and Corus Bank, (a unit of

Corus Bankshares

(CORS)

).

More Bank Failures on the Way

The FDIC announced in August that its "problem bank list" grew to 117 during the second quarter, from 90 in the first quarter. Since more bank failures are expected, here are some things to consider:

FDIC Insurance Limits.

The standard insurance limits of $100,000 for nonretirement account balances and $250,000 for some retirement accounts do not only apply to you. They also apply to businesses and municipal entities, such as school districts, that tend to have a great deal of somebody else's money flowing through CD and transaction deposit accounts.

Chances are that you or someone you know is closely affiliated with a large, uninsured depositor. The demise of

NetBank

last year provided an example of how easy it is for a small business to get creamed in a bank failure.

We've written further about various

FDIC insurance

scenarios and have discussed a convenient way of getting around insurance limits for

CD deposits

.

Brokered Deposits.

Millions of depositors have had their CD accounts arranged through brokers, who place deposits in banks all over the country. Since troubled banks and thrifts are likely to pay very competitive rates for deposits, it is quite common for failed banks to have a large portion of their FDIC insured deposits through brokers.

You should keep tabs on which banks your brokered CDs are in. In the event of a failure, contact the broker immediately, because the broker must work with the FDIC to get your money back. This process can take several weeks because the brokered CDs are held at the bank in the name of the broker, and the FDIC will need to cross-reference deposit accounts made at the bank with those made through brokers, to ensure that customers' total insured deposits don't exceed the limits.

You can easily check rates for deposit products from banks nationwide, including Internet banks, at

BankingMyWay.com

.

Ratings.

TheStreet.com Ratings issues financial strength ratings on each of the nation's 8,600 banks and savings and loans which are available at no charge on the

Banks & Thrifts Screener

. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the

Insurers & HMOs Screener

.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.