Bank of America's ( BAC) $4 billion deal for troubled mortgage lender Countrywide Financial ( JPM) has not gone unnoticed by JPMorgan Chase ( JPM). BofA's
rescue of Countrywide , which pairs the second-largest U.S. bank with the top mortgage lender in the nation, may create a mortgage powerhouse if BofA can endure the pain inherent in Countrywide's subprime-damaged balance sheet. The deal sees Charlotte, N.C.-based BofA acquiring Countrywide for about $7.16 a share in stock -- an offer that translates to 7.6% below Countrywide's closing price in Thursday trading. The undeniable appeal the Calabasas, Calif.-based Countrywide holds for BofA is the mortgage lender's 9-million-strong borrower base and its steady flow of fees from some $1.5 trillion of mortgages. Such numbers are compelling, even given all the possible risk associated with the mortgage business. For JPMorgan, the deal could embolden it to fill the gaps in its own platform. CEO Jamie Dimon has stated publicly that he wanted to both build out his mortgage business and grow in areas such as California, Florida, New England and the mid-Atlantic, where it does not have a footprint. One such deal that could help to solve those problems is a JPMorgan buyout of troubled Washington Mutual ( WM), another major mortgage player whose stock price has plummeted over the past year amid the housing slump and credit tightness.
"I think that Washington Mutual is by far the best candidate for
JPMorgan ," says Richard Bove, a financial analyst at Punk Ziegel. "Washington Mutual is the closest thing to a national retail system and gets Dimon into the West Coast and certifies its position in New York," Bove adds, noting that the purchase would also bring JPMorgan a whole new class of customers. A JPMorgan spokesman in New York declined to comment on any possible deal. A spokeswoman at Washington Mutual declined to comment on "rumor or speculation." Other regional retail banks that could be on JP Morgan's radar could be Suntrust Bank ( STI), Regions Financial ( RF) and National City ( NCC), according to Bove. Rumors of a possible combination of JPMorgan and Washington Mutual have been kicked around for the past few weeks, and CNBC reported Friday morning that the two banks have been in "very preliminary" talks about a possible deal. On Thursday, on the heels of scuttlebutt that BofA was orchestrating a Countrywide rescue, Washington Mutual's shares shot up almost 15% to end the day at $14.16, and they were trading up 3.3% to $14.62 Friday morning. Washington Mutual is about three times larger than Countrywide and carries an equally impressive mortgage portfolio.
Peter Cohan, president of consulting firm Peter Cohan & Associates, says that a JPMorgan-Washington Mutual deal would be logical. "I think it's an obvious response to match a BofA-
Countrywide deal," he said in an email, "And it looks like the market thinks it's in play." Although not a pure mortgage player, Seattle-based Washington Mutual has found itself steeped in mortgage loans that have dragged down its overall business. As a result, the Seattle-based company has seen its profits wane, forcing it to slash its dividend by more than half to 15 cents, as it pounds the pavement to raise cash. The bank has stated it expects to write down $1.6 billion of goodwill in the fourth quarter and raised its estimated provisions for first-quarter loan losses to about $2 billion. Meanwhile, JPMorgan has so far escaped many of the missteps of its peers, including Citigroup ( C) and Merrill Lynch ( MER), both of which have wrote down billions due to bad mortgage-related bets. As a result, JPMogran has been on the prowl to build up its business as some of its rivals flounder. Dimon has stated several times during conference calls that he was intent on expanding JPMorgan's mortgage platform to take advantage of the ever-shrinking number of viable players in the business.