Washington Mutual: Option ARMs, a $16.7B Run and the $1.9B Chase Sale

Got something to say to this podcast? Send a voicemail, and you might hear yourself on the next episode!

Washington Mutual was founded in 1889 after the Great Seattle Fire as the Washington National Building Loan and Investment Association, and it issued the first home mortgage on the West Coast in 1890. For nearly a century it was a conservative mutual savings bank, "the friend of the family." After demutualizing in 1983, it went on an acquisition spree: Pioneer Savings, Great Northwest and Pacific First, then American Savings, Great Western and Home Savings in California, Bank United in Texas and New York's Dime Bancorp. Integration was chaotic, with account ownership split after the Dime deal and loans from the Fleet mortgage acquisition vanishing from its systems.

Under CEO Kerry Killinger, WaMu aimed to be the Walmart of banking and pushed the option ARM, whose minimum payment did not cover interest while the bank booked deferred interest as revenue. Brokers earned more than $10,000 per option ARM, underwriting standards were gutted, and in 2005 it bought subprime card issuer Providian. In spring 2008 it rejected JPMorgan Chase's offer of $8 a share and took $7 billion from a TPG Capital group. Killinger was fired and Alan H. Fishman lasted 17 days. After depositors pulled $16.7 billion in nine days, regulators seized the bank on September 25, 2008, its 119th anniversary, and sold its operations to JPMorgan Chase for $1.9 billion.

• With over $300 billion in assets, it was the largest bank failure in U.S. history.
• By late 2007, WaMu was closing more than 160 loan offices and laying off thousands.
• Its stock, in the $40s a year earlier, fell to about $2 by September 2008.
• The holding company filed for Chapter 11 the next day and sued the FDIC for $13 billion, calling the seizure premature.
• It emerged in 2012 as WMI Holdings, which merged into Mr. Cooper Group in 2018.