NEW YORK (TheStreet) -- Next time a big bank fails, don't expect buyer to swoop in quickly, like JPMorgan Chase (JPM) did following the epic failure of Washington Mutual in September 2008.
When JPMorgan bought the failed Washington Mutual Bank (not the holding company) from the Federal Deposit insurance Corp. for $1.9 billion, it became the largest U.S. bank by deposits, and added over 2,200 branches. JPM at that time said that "Excluded from the transaction are the senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks. JPMorgan Chase will not be acquiring any assets or liabilities of the banks' parent holding company (WM) or the holding company's non-b bank subsidiaries."
In March of 2008, in a deal that was pushed by the Federal Reserve, JPMorgan had acquied Bear Stearns, which faced imminent bankruptcy as its liquidity dried up.
JPMorgan's landmark $13 billion residential mortage-backed securities (RMBS) settlement on Tuesday with the Department of Justice and other government authorities, and a previous $4.5 billion RMBS settlement with a group of institutional investors on Nov. 15, bring the bank's fourth-quarter mortgage litigation tab to at least $17.5 billion.
"Roughly 75%" of those combined settlement expenses were "driven by legacy WaMu and Bear issues," according to Goldman Sachs analyst Richard Ramsden.
In a note to clients on Thusday, Ramsden wrote that "When combined with previously announced economic losses, this has reduced what were forecasted to be mid-teens [internal rate of return, or] IRR deals into a negative $2bn P&L impact so far." On a more positive note, Ramsden added that "this doesn't fully capture the fact that the Bear deal helped JPM grow its revenue market share in U.S. capital markets from 19% (06-07) to 25%, while the WaMu deal filled key geographic 'holes' in CA, FL and WA."
But what it means to bank regulators is that the next time a major U.S. bank fails, major players may be very reluctant to do the government a favor by preventing a bankruptcy (as JPM did with the Bear Stearns deal), or preventing a painful FDIC receivership, which would have included billions of dollars to depositors, as JPMorgan did when it agreed to take on all of Washington Mutual's deposits, including the uninsured ones. The Washington Mutual failure occured before the basic deposit insurance limit was raised to $250,000 from $100,000, and before the FDIC temporarily lifted all deposit insurance limits on business checking accounts.
Through the Dodd-Frank banking reform legislation, Basel III and the great strengthening of supervision, regulators are hoping not to see another failure of a major U.S. bank, but in the event of another liquidity or credit crisis, a speedy acquisition of a large, flailing bank is unlikely.
"In the aftermath of these deals, future acquisitions of distressed banks are unlikely, in our view. This means regional banks may have to be self-resolvable and could be subject to new regulatory requirements on 'bail-inable' debt, Ramsden wrote.