University of central Punjab

Final Project

Financial Markets of Pakistan

SUBMITTED TO: Miss. Kainat Riaz

SUBMITTD BY GROUP MEMBERS:

Muhammad Zubair Humayun L1S09BBAM0057
Omer Yousaf L1F09BBaAM2037
Waqas Rafique L1F07BBAM2075

SECTION: A

Washington Mutual

ACKNOWLEDGEMENT

In the name of Almighty Allah who is most Merciful, and who give us strength to accomplish honors. We take this opportunity to acknowledge our teacher’s efforts Miss Kainat Riaz without which our success would not have been possible. Also would like to pay my gratitude to the very cooperative group members Omer, Waqas and Zubair and also want to applaud our parents for their selfless efforts and cooperation.

Executive Summary
This report explains that what were the rise and fall of the Washington Mutual the 119 year old bank. How JP Morgan acquired this bank? How it got bankrupt?

CONTENTS

Acknowledgement 2
Executive Summary……………………………………………………………………………….2 History of WASHINGTON MUTUAL 4
Principle Line of Business...............................................................................................................5
Reasons of Rise of Washington Mutual…………………………………………………………...6
Reasons of fall of Washington Mutual……………………………………………………………8
Conclusion……………………………………………………………………………………….12
Recommendations…………………………………………………………………………..........13
References………………………………………………………………………………………..14

Washington Mutual
Introduction of Washington Mutual
Washington Mutual, Inc. is a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association.
Washington Mutual was incorporated as the Washington National Building Loan and Investment Association on September 25, 1889, after the great Seattle fire destroyed 120 acres (0.49 km2) of the central business district of Seattle. The newly formed company made its first home mortgage loan on the West Coast on February 10, 1890. It changed its name to Washington Savings and Loan Association on June 25, 1908. By September 12, 1917 it was operating under the name Washington Mutual Savings Bank. The company purchased its first company, the financially distressed Continental Mutual Savings Bank, on July 25, 1930. Its marketing slogan for much of its history was "The Friend of the Family".
Despite its name, Washington Mutual ceased being a mutual company in 1983 when it demutualized and became a public company on March 11.
As of June 30, 2008, Washington Mutual Bank had total assets of US$ 307 billion, with 2,239 retail branch offices operating in 15 states, with 4,932 ATMs, and 43,198 employees. It held liabilities in the form of deposits of $188.3 billion, and owed $82.9 billion to the Federal Home Loan Bank, and had subordinated debt of $7.8 billion. It held as assets of $118.9 billion in single-family loans, of which $52.9 billion were "option adjustable rate mortgages" (Option ARMs), with $16 billion in subprime mortgage loans, and $53.4 billion of Home Equity lines of Credit (HELOCs) and credit cards receivables of $10.6 billion. It was servicing for itself and other banks loans totaling $689.7 billion, of which $442.7 were for other banks. It had non-performing assets of $11.6 billion, including $3.23 billion in payment option ARMs and $3.0 billion in subprime mortgage loans.
The FDIC sold the banking subsidiaries (minus unsecured debt or equity claims) to JPMorgan Chase for $1.9 billion, which re-opened the bank the next day. The holding company, Washington Mutual, Inc. was left with $33 billion assets, and $8 billion debt, after being stripped of its banking subsidiary by the FDIC. The next day, September 26, Washington Mutual, Inc. filed for Chapter 11 voluntary bankruptcy in Delaware, where it is incorporated.

Principle line of business
Washington Mutual (WAMU) is a leader in the banking industry, offering a wide variety of checking, savings, loans (including home refinancing and equity loans). Known for being one of the top 20 banks in the US, WAMU combines a large capital base with a good service record. When considering WAMU as the bank you use for loans, accounts, student loans, or other refinancing services, we suggest you compare their specific account product offerings.
Washington Mutual's principal business is as a savings bank in the business of making mostly mortgage loans. Enterprise is a commercial bank. Thanks to Washington Mutual's conversion last fall to a holding-company format, it now can operate on the commercial side, meaning it can make loans for such things as boats and cars and do small business lending. Enterprise - with its name, employees, and founder and Chairman Tom Cleveland intact - will operate as the first commercial bank unit of Washington Mutual Bank.
Washington Mutual (or WaMu; NYSE :) is the United States' largest savings and loan association. Mutual Despite its name, Washington Mutual it is not a credit union, and ceased being a mutual company in 1983. Washington Mutual is publicly traded on the New York Stock Exchange.
Washington Mutual's principal activities are to provide financial services to consumers and small businesses such as retail banking, mortgage lending, consumer lending, business banking, business lending, insurance services, credit card services, commercial real estate mortgage and consumer investment services. Popular products include calculator mortgage mutual Washington, home loan mutual payment Washington, mortgage mutual payment Washington, and always popular mortgage mutual rate refinance Washington.
Washington Mutual is the sole surviving major Seattle-based bank after the flurry of mergers in the 1980s and 1990s ended the independence of Rainier Bank, Seafirst Bank, and People's Bank, among others. Washington Mutual operates more than 2,600 retail banking, mortgage lending, commercial banking, and financial services offices, as of June 30, 2006.
Washington Mutual was founded as the Washington National Building Loan and Investment Association on September 25, 1889, in an attempt to save Seattle's economy after a fire nearly destroyed the city. It made the first home mortgage loan on the West Coast on February 10, 1890. Its name was changed to Washington Savings and Loan Association on June 25, 1908. During World War I, its assets would expand by 68%.
By now called Washington Mutual Savings Bank, the company made its first acquisition on July 25, 1930, by purchasing Continental Mutual Savings Bank. Over the next fifty years, it would be involved in pioneering cash machine networks and telephone banking. There are many Washington Mutual locations today.

Reasons of Rise of Washington Mutual
Owner of the third-largest savings and loan in the United States, Washington Mutual, Inc. operates as the bank holding company for Washington Mutual Bank, its chief operating subsidiary, and various other financial services businesses. Included under Washington Mutual's corporate umbrella during the mid-1990s were Washington Mutual Bank, a federal savings bank, Washington Mutual Life Insurance Company, a life insurance company, Murphey Favre, Inc., a securities brokerage service, and Composite Research & Management Co., an investment advisor firm. Founded in 1889, Washington Mutual registered rampant growth during the 1990s as it expanded throughout the Pacific Northwest. In 1996, the bank nearly doubled its size by acquiring Irvine, California-based American Savings Bank.
World War I Conversion into a Mutual Bank
In 1917, while the country's newspapers covered the progress of war overseas, Washington Savings and Loan converted into a mutual savings bank and once again changed its name. Rechristened Washington Mutual Savings Bank, the recast institution boasted more than 16,000 depositors at the time of the United States' entrance into World War I and benefitted substantially from the century's first epic military struggle. During World War I, Washington Mutual's assets rose 68 percent, recording a gain of more than $4 million, and real estate loans registered an even greater increase, by 250 percent. Washington Mutual's deposits increased strongly, rising from $15 million in 1921 to more than $26 million two years later.

Statewide Expansion Begins in 1964
Citizens Mutual Savings Bank's existence as a mutual bank was only hours old when Washington Mutual sealed the deal to purchase the eastern Washington-based financial institution. Founded in 1902 as Citizens Savings and Loan Society, the thrift operated as a savings and loan up until its acquisition by Washington Mutual, acquiring the Pullman Savings and Loan Association the year prior to the 1964 Washington Mutual acquisition. Against the backdrop of these acquisitions, Washington Mutual expanded geographically through internal means by establishing branch offices on its own. Between 1965 and 1973, the bank opened 15 branch offices in the Seattle area and in regions across the state, building itself into a dominant force in Washington State.
1982 Arrival of Killinger
At the time of the 1982 acquisition, Killinger was 32 years old and had served as a securities analyst and investment broker for the company before being named executive vice-president. Once brought into the Washington Mutual fold, Killinger rose quickly through the bank's executive ranks, becoming president in 1988 and chief executive officer two years later. During Killinger's rise, Washington Mutual was moving in a different direction, as the bank began to decline and suffers from waning profitability. With earnings slipping late in the decade, a new program aimed at restoring profitability and invigorating growth was launched, one that would dramatically amplify the magnitude of Washington Mutual's geographic scope.

1990s: Unprecedented Growth
For the first time in the bank's history, it extended its presence beyond Washington's borders, compensating for its belated entry into the regional banking arena by expanding aggressively at a time when the savings and loan industry in general was faring poorly.
In 1991, Washington Mutual ranked as Washington's largest independently owned financial institution, with $8 billion in assets and 84 financial centers and 17 home loan centers in its home state, Oregon, and Idaho. These impressive figures would soon be dwarfed by the magnitude of the bank four years later, as Washington Mutual's acquisition spree ignited its growth, carried the bank into Montana and Utah, and necessitated the formation of Washington Mutual, Inc. as a holding company in August 1994. Between 1991 and 1995, Washington Mutual's profits more than doubled, leaping from $80.6 million to $190.6 million, its deposits increased from $5.4 billion to $10.6 billion, and its assets swelled from $8 billion to $21.6 billion. Meanwhile, the number of branch offices operated by the bank had increased dramatically, reaching a total of 248 financial centers and 23 loan centers by the end of 1995. The first half of the 1990s represented a period of growth unrivaled in Washington Mutual's history. As the bank entered the late 1990s it did not slow its pace of growth, rather, its pace increased.
We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe's-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.
Killinger’s goal was to build WaMu into the “Wal-Mart of Banking,” which would cater to lower- and middle-class consumers that other banks deemed too risky. Complex mortgages and credit cards had terms that made it easy for the least creditworthy borrowers to get financing, a strategy the bank extended in big cities, including Chicago, New York and Los Angeles. WaMu pressed sales agents to approve loans while placing less emphasis on borrowers’ incomes and assets. WaMu set up a system that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers. Variable-rate loans — Option Adjustable Rate Mortgages (Option ARMs) in particular — were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. As WaMu was selling many of its loans to investors, it worried less about defaults.

Reasons of fall of Washington Mutual
The failure of Washington Mutual Bank (WaMu), Seattle, Washington; the Office of Thrift Supervision’s (OTS) supervision of the institution; and the Federal Deposit Insurance Corporation’s (FDIC) monitoring of WaMu for insurance assessment purposes. OTS was the primary federal regulator for WaMu and was statutorily responsible for conducting full-scope examinations to assess WaMu’s safety and soundness and compliance with consumer protection laws and regulations. FDIC was the deposit insurer for WaMu and was responsible for monitoring and assessing WaMu’s risk to the Deposit Insurance Fund (DIF). On September 25, 2008, FDIC facilitated the sale of WaMu to JPMorgan Chase & Co in a closed bank transaction that resulted in no loss to the DIF. The collapse marked the largest bank failure in U.S. history, far bigger than that of Continental Illinois, which failed in the 1980s and had just $40 billion in assets. Despite this tantalizing selling point, WaMu’s failure hasn’t received nearly the public scrutiny that many of the other casualties of the financial crisis have received — Bear Stearns, Lehman Bros., AIG, etc.
WaMu failed because of its management’s pursuit of a high-risk lending strategy coupled with liberal underwriting standards and inadequate risk controls. Ultimately, WaMu’s high-risk strategy broke down when the housing and mortgage market collapsed in mid-2007, leaving WaMu with loan losses, borrowing capacity limitations, and a significantly depressed stock price. In September 2008, WaMu was unable to raise capital to counter significant depositor withdrawals sparked by rumors of WaMu’s problems and other high-profile failures during that time.
WaMu Pursued a High-Risk Lending Strategy In 2005, WaMu management made a decision to shift its business strategy away from originating traditional fixed-rate and conforming single family residential loans, towards riskier nontraditional loan products and subprime loans.
WaMu pursued the new strategy in anticipation of increased earnings and to compete with Countrywide Financial Corporation, which, in 2005, WaMu’s CEO saw as “arguably the strongest competitor at this time because of system stability, strong profitability, excellent risk management and aggressive growth plans.”
WaMu was fine until August 2007, when the secondary market for mortgage-backed securities disappeared. WaMu could not resell these mortgages, and this, combined with the housing decline, prevented it from selling new mortgages and taking in new cash.
By 2007, it had to write-off $1.6 billion in defaulted mortgages. It also had to set aside additional cash to provide for future losses, resulting in a total net loss for the quarter of nearly $2 billion.
As a result, WaMu reported a net loss of $67 billion for 2007, after just reporting a profit of $3.6 billion for 2006. (Source: WaMu 2007 Annual Report)
In April 2008, the holding company, responding to losses and difficulties sustained as a result of the 2007-2008 subprime mortgage crisis, announced that 3,000 people companywide would lose their jobs, and the company stated its intent to close its approximately 186 remaining stand-alone, home-loan offices, including 23 in Washington State and a loan-processing center in Bellevue, Washington. It stopped buying loans from outside mortgage brokers — known in the trade as "wholesale lending." WaMu also announced a $7 billion infusion of new capital by new outside investors led by TPG Capital. TPG agreed to pump $2 billion into the Washington Mutual holding company; other investors, including some of WaMu's current institutional holders, agreed to buy an additional $5 billion in newly issued stock. This angered many investors, as TPG's investment would dilute the holdings of existing shareholders, and as WaMu executives excluded mortgage losses from computing bonuses.
In June 2008, Kerry Killinger stepped down as the Chairman, though remaining the Chief Executive Officer. On September 8, 2008, under pressure from investors, the Washington Mutual holding company's board of directors dismissed Kerry Killinger as the CEO. Alan H. Fishman, chairman of mortgage broker Meridian Capital Group, and a former chief operating officer of Sovereign Bank, was named the new CEO.
By mid-September 2008, WaMu's share price had closed as low as $2.00. It had been worth over $30.00 in September 2007, and had traded as high as $45 at one point in the previous year. While WaMu publicly insisted it could stay independent, earlier in the month it had quietly hired Goldman Sachs to identify potential bidders. However, several deadlines passed without anyone submitting a bid. At the same time, WaMu suffered a massive run (mostly via electronic banking over the internet and wire transfer); customers pulled out $16.7 billion in deposits in a ten-day span.

WaMu Was Hit Hardest by California Housing Decline:
Nationally, home values increased until 2006, reaching a peak of 20% year-over-year growth in 2004. But by the second half of 2007, home values had started declining. By the end of 2007, the national average home value was down 9.8% - which hadn't happened since the Great Depression.
WaMu did a lot of business in California, where the housing market did worse than in other parts of the country. By the end of 2007, home inventories were at 15 months, compared to 10 months nationally and six months during normal times. Although WaMu only wrote 20% of its mortgages at greater than 80% loan-to-value ratio, by the end of 2007, many loans were more than 100% of the home's value.

Lehman Brothers Bankruptcy Caused Run on Deposits:
On September 15, Lehman Brothers declared bankruptcy. This panicked depositors, who withdrew $16.7 billion out of their savings and checking accounts over the next 10 days. Since this was about 10% of WaMu's deposits, the Federal Deposit Insurance Corporation (FDIC) said the bank had insufficient funds to conduct day-to-day business. The FDIC started looking for buyers.
J.P. Morgan Bought the Bank for $1.9 Billion:
On September 26, the FDIC took over the bank and sold it to J.P. Morgan for $1.9 billion. The cost is actually higher, since J.P. Morgan will need to write down $31 billion in bad loans and raise $8 billion in new capital. Bondholders will lose all $30 billion in their investments in WaMu. J.P. Morgan got a good deal, since WaMu had about $300 billion in assets. However, due to the current credit crunch, no other bank bid on WaMu, including Citigroup, Wells Fargo and Banco Santander South America. (Source: WSJ.com, "WaMu Is Seized," September 26, 2008)
This led the Federal Reserve and the Treasury Department to step up pressure for WaMu to find a buyer, as a takeover by the Federal Deposit Insurance Corporation (FDIC) could have been a severe drain on the FDIC insurance fund, which had already been hard hit by the failure of Indy Mac that year. The FDIC ultimately brokered the deal, and held a secret auction of the bank. Finally, on the morning of Thursday, September 25 (coincidentally the 119th anniversary of WaMu's establishment), regulators informed JPMorgan Chase that it was the winner. JPMorgan Chase & Co. Inc. came to the rescue of Washington Mutual Inc. Thursday, buying the thrift's banking assets after WaMu was seized by the Federal Deposit Insurance Corp. in the largest failure ever of a U.S. bank. This is the second time in six months that JPMorgan Chase has taken over a major financial institution crippled by bad bets in the mortgage market.
JPMorgan Chase didn't acquire any of Washington Mutual Bank's equity obligations (though JPMorgan Chase planned to issue $8 billion in common stock to recapitalize the bank). As a result of the seizure, WaMu's stockholders were nearly wiped out. Its stock price dropped to $0.16 a share, far from $45 a share in 2007. The filing also indicates that enough funds are available for distribution to unsecured creditors.

Conclusion
According to Kirsten Grind the rise and fall of Washington mutual is as follows:
Kirsten Grind has signed on with New York publishers Simon & Schuster to write the dramatic story of the collapse of Washington Mutual, the largest bank failure in U.S. history. On Sept. 25, 2008 regulators seized the 119-year old company, selling it quickly to JPMorgan Chase for $1.9 billion. In the following days, months and years, Grind slowly uncovered the many reasons for the bank's historic collapse, and also pieced together its tumultuous final months, in which executives tried desperately to save the institution. Her subsequent stories covering WaMu's collapse, and the secretive decisions made by the federal government about its closure, became a 2010 Pulitzer Prize finalist for explanatory reporting.
The book, tentatively titled "The Rise and Fall of WaMu" will span the last 20 years of the bank's history, detailing how Washington Mutual, once the banking darling of the United States, and known as "the Friend of the Family," came crashing down in the fall of 2008. "The Rise and Fall of WaMu" will chronicle the human drama that played out over those last two decades and the executives whose decisions personally and professionally ultimately altered the course of history. It will also take an unprecedented look at the battle in Washington, D.C. over the bank's future, and the role of its acquirer, JPMorgan Chase.

Recommendations * Regulatory Challenges Related to Washington Mutual * The points highlighted by OTS for the failure of the Bank should have been applied like OTS recommended, and the bank agreed, to spell out its new lending strategy in a written document that had to be approved by the WaMu Board of Directors. * In 2007, as high risk loan delinquencies and defaults accelerated and WaMu began to incur losses, OTS examiners used harsher language to describe the deficiencies in WaMu's risk management practices, criticizing the bank's failure to institute stronger risk controls and procedures at an earlier date, as recommended. * OTS recommendations and criticisms in the appraisal area in the past, the OTS appraisal expert told the Subcommittee that he saw nothing to indicate that WaMu management could not competently handle a large appraisal outsourcing project of this scale. * Shortly before WaMu was sold, OTS' staff prepared a draft recommendation that the agency issue a cease order to bar the bank from engaging in any activity that would lead to further violation of the appraisal regulations. * In June 2005, an OTS examiner expressed concerns about the purchase in an internal memorandum to OTS regional management and recommended that the purchase be conditioned on operational improvements.
References
http://en.wikipedia.org/wiki/Washington_Mutual http://www.fdic.gov/bank/individual/failed/wamu.html http://www.doctorhousingbubble.com/washington-mutual-failure-and-collapse-wamu-largest-savings-and-loan-failure-in-us-history-the-rise-and-fall-of-washington-mutual/ http://www.kirstengrind.com/index.php/the-book/ http://useconomy.about.com/od/businesses/p/wamu.htm http://www.scribd.com/doc/52705409/Evaluation-of-Federal-Regulatory-Oversight-of-Washington-Mutual-Bank http://www.cnbc.com/id/47874555 http://www.gossiprocks.com/forum/u-s-politics-issues/83388-washington-mutual-goes-bankrupt-largest-bank-failure-history.html http://money.cnn.com/magazines/fortune/fortune_archive/1997/12/08/234900/index.htm http://community.seattletimes.nwsource.com/archive/?date=19950602&slug=2124302 http://www.keepandshare.com/htm/advice/banks/wamu/best_free_wamu_wam_amu_wmu_bank.php http://www.referenceforbusiness.com/history2/46/Washington-Mutual-Inc.html http://www.derechos.org/nizkor/econ/crisis27.html