The Rise and Fall of Washington Mutual: America’s Largest Bank Failure

The recent crisis at Silicon Valley Bank has raised concerns about the stability of banks and the risks of rapid growth and lending. It’s worth looking back at the example of Washington Mutual (WaMu), once the largest failed bank in US history, to understand how a bank can come to such a catastrophic end (here is a current list of the largest banks in the U.S.) WaMu was once a conservative savings and loan bank with over 43,000 employees, but it failed for five main reasons, including doing a lot of business in California, expanding too quickly, and being unable to resell mortgages. The bank was taken over by JPMorgan Chase in 2008, resulting in significant losses for bondholders, shareholders, and investors. The story of WaMu serves as a cautionary tale for banks and investors alike.

Before its downfall, Washington Mutual had over $307 billion in assets and $188 billion in deposits when it collapsed in 2008. In contrast, Silicon Valley Bank (SVB) had approximately $209 billion in total assets and $175 billion in total deposits by the end of 2022, which could make it the second-largest U.S. bank to fail in terms of assets and deposits.

Washington Mutual (WaMu) was once a conservative savings and loan bank that became the largest failed bank in US history in 2008. By the end of 2007, WaMu had over 43,000 employees, 2,200 branch offices in 15 states, and $188.3 billion in deposits. Its main customers were individuals and small businesses, with nearly 60% of its business coming from retail banking and 21% from credit cards. Despite only 14% of its business being from home loans, it was enough to bring the bank to bankruptcy by the end of 2008. In this article, we will explore the reasons behind WaMu’s failure, who took over the bank, and who suffered the losses.

There were five main reasons why WaMu failed. First, it did a lot of business in California, where the housing market did worse than in other parts of the country. The national average home value fell 6.5% from its 2006 high by December 2007, and in California, there was over 15 months’ worth of unsold inventory, compared to the usual six months’ worth of inventory. By the end of 2007, many loans were more than 100% of the home’s value, despite WaMu’s attempts to be conservative. This problem was exacerbated by the second reason for WaMu’s failure – its rapid branch expansion, which resulted in poor branch locations in too many markets, and too many subprime mortgages to unqualified buyers.

The third reason was the collapse of the secondary market for mortgage-backed securities in August 2007. Like many other banks, WaMu could not resell these mortgages, as falling home prices meant they were worth more than the houses they were backed by. WaMu couldn’t raise cash, and in the fourth quarter of 2007, it wrote down $1.6 billion in defaulted mortgages. Bank regulations forced it to set aside cash to provide for future losses, resulting in a $1.9 billion net loss for the quarter, and a net loss for the year of $67 million – a far cry from its 2006 profit of $3.6 billion.

The fourth reason for WaMu’s failure was the Lehman Brothers bankruptcy on September 15, 2008. WaMu depositors panicked and withdrew $16.7 billion out of their savings and checking accounts over the next 10 days, over 11 percent of WaMu’s total deposits. The Federal Deposit Insurance Corporation (FDIC) said the bank had insufficient funds to conduct day-to-day business, and the government started looking for buyers. WaMu’s bankruptcy can be better analyzed in the context of the 2008 financial crisis timeline. The fifth and final reason for WaMu’s failure was its moderate size. It was not big enough to be “too big to fail,” and as a result, the US Treasury or the Federal Reserve wouldn’t bail it out like they did Bear Stearns or American International Group.

On September 25, 2008, the FDIC took over the bank and sold it to JPMorgan Chase for $1.9 billion. The next day, Washington Mutual Inc., the bank’s holding company, declared bankruptcy. JPMorgan Chase got a good deal, paying only $1.9 billion for about $300 billion in assets, but it had to write down $31 billion in bad loans and raise $8 billion in new capital to keep the bank going. No other bank bid on WaMu. Citigroup, Wells Fargo, and even Banco Santander South America passed on it. Chase wanted WaMu’s network of 2,239 branches and a strong deposit base, giving it a presence in California and Florida.

Bondholders, shareholders, and bank investors paid the most significant losses. Bondholders lost approximately $30 billion in their investments in WaMu, and most shareholders lost all but five cents per share. TPG Capital lost its entire $1.35 billion investment, and the WaMu holding company sued JPMorgan Chase for access to $4 billion in deposits. Deutsche Bank also sued WaMu for $10 billion in claims for defunct mortgage securities, alleging that WaMu knew they were fraudulent and should buy them back. It was unclear whether the FDIC or JPMorgan Chase were liable for any of these claims. Ultimately, the failure of Washington Mutual was a significant event in the financial crisis of 2008 and serves as a cautionary tale for the dangers of rapid expansion and subprime lending.