Washington Mutual (WaMu) has become the biggest US bank to fail, as regulators were forced to take control and sell off the mortgage lender.

The Office of Thrift Supervision (OTS) sold its assets to JPMorgan Chase for $1.9bn (£1bn) after $16.7bn of deposits had been withdrawn in 10 days.

Regulators were quick to reassure customers that WaMu would be trading as usual despite the change of ownership.

WaMu was hit by mortgage defaults the collapse of the US housing market.

“For bank customers, it will be a seamless transition,” said Stella Blair, chairman of the Federal Deposit Insurance Corporation (FDIC).

“Bank customers should expect business as usual come Friday morning.”

WASHINGTON MUTUAL

2,239 branches in 15 states
43,198 employees on 30 June
Set up in 1889

“With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,” the OTS said.

The bank had about $307bn of assets but only about $188bn of deposits, which meant it had to raise funding on money markets, which has become increasingly expensive.

Additional funding

It raised an extra $7bn of capital from a consortium led by the private equity group TPG in April.

If WaMu had just failed then depositors would have been compensated by the FDIC, so the sale to JPMorgan may be a positive step.

“There was some concern that if a bank the size of WaMu failed the FDIC fund would not be adequate to meet the task and would require additional funding from the government,” said David Resler, chief economist at Nomura Securities.

Instead, the responsibility for the deposits has been transferred to JPMorgan Chase.

“That means the FDIC fund is intact and can be used for other closures if necessary,” Mr Resler added.

Sub-prime lending

It is less than three weeks since WaMu dismissed its chief executive Kerry Killinger, who it blamed for the bank’s expansion into sub-prime and other comparatively risky lending.

Sub-prime mortgages are offered to borrowers with inferior credit records or unpredictable incomes.

WaMu is JPMorgan’s second big fire-sale acquisition since the start of the credit crunch. It bought Bear Stearns in March.

WaMu launched an upbeat advertising campaign in February

The WaMu deal means it is now the second-biggest US bank, with 5,410 branches in 23 states.

“This deal makes excellent strategic sense for our company and our shareholders,” said Jamie Dimon, chairman of JPMorgan Chase.

Before WaMu’s closure was announced, it had a stock market value of $2.9bn.

In February this year, WaMu unveiled a new Whoo Hoo! advertising campaign, aiming to “capture the essence of what it feels like to bank at WaMu”.

News reported by The BBC

The global financial crisis is set to get worse, with a large US bank likely to collapse in the next few months, a former IMF chief economist has warned.

Kenneth Rogoff’s comments came as shares in Fannie Mae and Freddie Mac sank on a report that the home lenders would, in effect, be nationalised.

Despite hopes that the US economy had turned the corner, Mr Rogoff claimed it was “not out of the woods”.

“I would even go further to say ‘the worst is to come’,” he said.

“We’re not just going to see mid-sized banks go under in the next few months,” said Mr Rogoff, who held the IMF role between 2001 and 2004.

“We’re going to see a whopper, we’re going to see a big one, one of the big investment banks or big banks.”

“We have to see more consolidation in the financial sector before this is over” Kenneth Rogoff

Speaking at a conference in Singapore, Mr Rogoff, now an economics professor at Harvard, forecast that Fannie Mae and Freddie Mac would “probably” not exist in their present form in a few years.

“We have to see more consolidation in the financial sector before this is over.”

On Monday, shares of Fannie Mae fell more than 22%, or $1.76, to close at $6.15. Shares of Freddie Mac fell almost 25%, or $1.46, to $4.39.

‘Wrong move’

Shares in Freddie and Fannie first fell sharply last month on fears that they would run out of money to fund their business, forcing the US government to take radical steps to ease the panic.

The two firms are the backbone of the US mortgage market as almost all US lenders rely on them to buy their mortgages in order to access the funds to lend to consumers.

As mortgage guarantors, they must pay out when homeowners default on their loans.

With the housing market across the US crumbling, their finances have come under severe stress.

Problems in the US housing sector prompted the Federal Reserve to slash interest rates to 2% earlier this year.

But Mr Rogoff said the Fed was wrong to cut interest rates as “dramatically” as it did.

“Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States,” he added.

News reported by The BBC

JP Morgan Chase, the third-largest US bank, says it has sustained $1.5bn (£0.8bn) in losses related to the sub-prime crisis since the end of June.

That was more than the $1.1bn write-down the bank took on mortgage-linked assets in the April to June quarter.

JP Morgan said trading conditions had “substantially deteriorated” – a sentiment echoed by its rivals.

Wachovia, the fourth-largest US bank, said it lost more money than previously thought in the second quarter.

The bank said its losses for the quarter now totalled $9.11bn, up from the $8.86bn originally reported.

Wachovia will also cut 600 jobs on top of the 6,950 it had previously announced as the housing market deteriorates

Mortgage exposure

Last month, JP Morgan reported that second-quarter profit had fallen 52% to $2bn.

At the end of June, it held roughly $33bn worth of exposure to the mortgage market, including $1.9bn directly related to sub-prime mortgages lent to those with patchy or poor credit histories.

“Mortgage exposures could be adversely affected by worsening market conditions, further deterioration in the housing market and market activity reflecting distressed sellers,” the bank said.

The New York-based company, which bought struggling Bear Stearns in May, had been thought to be weathering the credit crunch better than its peers.

News reported by The BBC