According to regulators, J.P. Morgan (JPM) may not have received the sweetheart deal it was reported to have received after submitting its winning bid for Washington Mutual.
Pursuant to a Freedom of Information Act request, the Wall St. Journal received a previously unreleased document from federal regulators. The details of the transaction appear to weaken claims that the FDIC bent over backward to award Washington Mutual’s business to J.P. Morgan.
The document shows that Citigroup Inc. (C) was the only other bank to bid for Washington Mutual as part of the auction process for insured U.S. banks and savings institutions that fail. Under federal law, the FDIC must accept the “least-cost” offer from potential acquirers.
Citigroup initially considered buying Washington Mutual after being approached by the beleaguered thrift, according to people familiar with the matter, but didn’t make an offer.
Shortly before Washington Mutual was seized, FDIC officials sought bids from potential buyers. The day before the failure, Citigroup submitted what it called an “indicative” bid.
Terms of the offer by the New York bank previously were kept secret by the Federal Deposit Insurance Corp., which sold the failed banking units to J.P. Morgan Chase & Co. for $1.88 billion in September 2008.
In a letter, Edward Kelly III, now chairman of global banking in Citigroup’s institutional-clients group, wrote that the offer did “not conform to the bidding instructions for Washington Mutual.” Still, the letter added, “our suggested approach will in fact provide greater systemic stability and lower losses than would any conforming bid.”
Citigroup Inc.’s unsuccessful bid for the teetering banking operations of Washington Mutual Inc. offered no upfront cash as part of its bid and didn’t want to assume Washington Mutual’s uninsured deposits.
Citigroup also wanted the FDIC to cover 80% of “first losses” on the thrift’s loans, including mortgages battered by declining real-estate values. Losses by the New York bank on the remaining 20% would have been capped at $10 billion, the document shows, with the FDIC stuck with any additional loan losses.
In comparison, J.P. Morgan sought and received no loss-sharing agreement from the FDIC. It also took control of all deposits held by Washington Mutual, whose collapse was the largest bank failure in U.S. history. “It would appear from publicly available documents that J.P. Morgan was far and away the best bidder,” said Kevin Starke, an analyst with CRT Capital Group LLC in Stamford, Conn. “In hindsight, Citi’s bid was too conservative.”
“The FDIC was able to sell WaMu through an unassisted transaction that protected all depositors and resulted in zero exposure to the government,” an FDIC spokesman said. “No other bid accomplished this.” Citigroup, J.P. Morgan and the Washington Mutual holding company, now in bankruptcy proceedings, declined to comment.
Former Washington Mutual Chief Executive Kerry Killinger told a Senate subcommittee last week that the seizure was unnecessary, accusing regulators of helping only financial institutions deemed “too clubby to fail.” The old parent company has contended the banking operations were worth more than the $1.88 billion paid by J.P. Morgan, while bondholders have accused J.P. Morgan of fostering the conditions that led to the seizure. The FDIC, Washington Mutual’s old parent company and J.P. Morgan are battling in a federal court over billions of dollars in deposits, pension benefits and tax refunds. A tentative settlement would split the assets among the three parties.
