Everett, Wash.
Published: Tuesday, September 30, 2008

Bailout vote's failure won't derail WaMu sale

Associated Press

 WASHINGTON -- JPMorgan Chase's purchase of the failed thrift Washington Mutual will go forward despite Monday's House defeat of a $700 billion financial system bailout that would have enabled JPMorgan to sell WaMu's worst assets to the government.

Citigroup's acquisition of Wachovia hasn't closed yet.

JPMorgan said last week its $1.9 billion acquisition of WaMu's stressed loan portfolio could result in a $31 billion write-down. The bailout plan tentatively agreed to by Congress over the weekend would have allowed JPMorgan to sell WaMu's troubled mortgage-related assets to the government -- at a profit.

Confirming that the House defeat of the proposed federal bailout wouldn't affect its purchase of WaMu, JPMorgan spokesman Tom Kelly said, "That train has already left the station."

Joe Heider, president of Dawson Wealth Management in Cleveland, said JPMorgan should be able to shoulder the $31 billion in write-downs it plans to take on WaMu's distressed assets without any government assistance, but that this does present a greater risk to the bank.

"They can handle it but it is a higher risk than it was before the vote," Heider said.

Shares of JPMorgan fell $4.97, or 10.3 percent, to $43.27 in afternoon trading. The Dow Jones industrial average sank 777.68 points -- the largest point drop ever -- after the House defeated the bailout plan. President Bush and congressional leaders of both parties warned that the economy could nosedive without it.

While the federal rescue package would have prevented most banks from profiting on the sale of troubled assets to the government, an exception was going to be made for assets acquired in a merger or buyout.

This would allow Citigroup to sell Wachovia's distressed mortgage-related assets to the government for a profit, assuming its $2.1 billion acquisition went through.

The failure of the bailout plan raises questions about just how banks are going to deal with billions upon ­billions of toxic mortgage debt on their books, and casts doubt on whether Citigroup and JPMorgan will be able to rid themselves of the debt from their respective acquisitions.

Heider believes Citigroup will still go forward with the deal, but noted that at this point, anything is possible.

"If Citi would walk away from the Wachovia deal that would just create more unsettled nerves on Wall Street," Heider said. "The market could drop significantly more."

Citigroup's proposed acquisition of Wachovia calls for it to assume $53 billion worth of debt and up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the Federal Deposit Insurance Corp. agreeing to cover remaining losses.

Citigroup would pay the FDIC $12 billion in preferred stock and warrants to compensate the agency for taking on the risk.

Citigroup's news release on the acquisition notes that it is subject to approval by Wachovia's shareholders and regulators and must be completed by Dec. 31.

Shares of Citigroup sank $1.34, or 6.95 percent, to $18.75.
© 2009The Daily Herald Co., Everett, WA