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Feds seize WAMU
September 26, 2008 | posted by: Andrew C Maleski

Wall Street financial woe continues.

Washington Mutual Inc. was seized yesterday afternoon by federal regulators, with most of the deposits and assets sold to JP Morgan Chase. Large outflows of cash from customers in California led to the largest bank failure in U.S. history. In the nine days prior to its seizure by U.S. government officials, Washington Mutual customers withdrew $16.7 billion. Washington Mutual had combined assets of $307 billion and total deposits of $188 billion.

According to the deal struck between the FDIC and JP Morgan Chase all WAMU customers and depositors will be protected and will not loose any of their assets. Bank branches will be open as usual and bank will be run jointly by FDIC and JP Morgan Chase until full transition takes place.

The failure of WAMU marks the latest upheaval in a financial crisis that has claimed some of largest names in Wall Street in recent months, including government bailouts of insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac. Prior to WAMU, the largest U.S. bank to fail was Continental Illinois National Bank & Trust Co., which had $40 billion in assets when it was rescued during the savings and loan crisis of the 1980s. Just for comparison Indy Mac, another California bank which collapsed in July had 32 billion dollars in assets.

Government proposed $700 billion dollar bailout of the financial firms is still in question. Yesterday talks between the Bush administration, the Treasury, the Fed, and the representatives in Congress did not produce any agreement. Our financial system is still in disarray. Banks loose faith in each other, credit markets get tight and money is scarce.

What is interesting, this morning J.P. Morgan Chase & Co. released its outlook for the California real estate. The estimate on home prices was included in materials prepared for a conference call on Thursday evening outlining the purchase of Seattle-based Washington Mutual. Currently, J.P. Morgan estimates that home prices in California will fall 44% from their highs of a few years ago before bottoming out.

But if there is a deeper-than-expected recession, J.P. Morgan said, home prices in the Golden State are expected to bottom out 48% below their highs -- and, if a recession turns out to be "severe," the bank expects prices to bottom 58% off their high.

In May of 2007 median home price in the L.A County reached all time high at $585,000. As of Sept 21, 2008 it stood at $429,000 which represents 27% drop. If JP Morgan predictions are correct L.A home prices might fall by 20% to 30% more. That is a scary thought.

Andrew C Maleski 2008. All rights reserved
Sources: News Wire, Forbes,The New York Times

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