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WaMu Files for Bankruptcy Following FDIC Seizure

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Alfrescian (Inf)
Asset
WaMu Files for Bankruptcy Following FDIC Seizure (Update2)
By Christopher Scinta and Tiffany Kary
Sept. 27 (Bloomberg) -- Washington Mutual Inc., a holding company for the savings and loan that became the biggest U.S. bank to fail, filed for bankruptcy protection along with its unit WMI Investment Corp.
WaMu, the 119-year-old Seattle-based thrift, filed for Chapter 11 bankruptcy in U.S. Bankruptcy Court in Delaware, according to a release from Business Wire. The Delaware bankruptcy Web site was closed for site maintenance. Ian Campbell, a spokesman for the bankrupt holding company with Abernathy MacGregor Group, said he couldn't provide further details.
WaMu had its banking unit seized Sept. 25 by government regulators after customers withdrew $16.7 billion over 10 days. JPMorgan Chase & Co. became the biggest U.S. bank by deposits when it bought WaMu's branches with a $1.9 billion payment to the Federal Deposit Insurance Corp.
WaMu had fallen 98 percent over the past year on losses tied to subprime lending before trading was halted on news of the FDIC seizure. The company was one of the financial firms the U.S. Securities and Exchange Commission protected from short selling this month as part of an effort to stabilize equity markets. WaMu's bank had $188 billion in deposits.
The company's collapse makes WaMu the latest victim of the credit crunch, which also forced Lehman Brothers Holdings Inc. and IndyMac Bancorp into bankruptcy, drove Merrill Lynch & Co. to sell itself to Bank of America Corp. and brought about the Federal Reserve-financed purchase of Bear Stearns Cos. by JPMorgan Chase & Co.
Ratings Cuts
The Chapter 11 bankruptcy petition, filed Sept. 26 in U.S. Bankruptcy Court in Delaware, wasn't immediately available due to Web site maintenance. The Web site was expected to be operating again on Sept. 27 at noon, Eastern time.
JPMorgan, Citigroup Inc., Wells Fargo & Co., Banco Santander SA and Toronto-Dominion Bank had all expressed interest in buying all or parts of WaMu ahead of the JPMorgan purchase.
WaMu was expected to lose as much as $19 billion on bad mortgages during the next 2 1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days, to eight levels below investment grade, as chances decreased that any deal wouldn't be a buyout of the whole company, leaving creditors of the holding company to face substantial losses.
The failure of WaMu will have a ``significant'' effect on collateralized debt obligations that made bets on the lender's creditworthiness, Standard & Poor's said yesterday.
Pieces of 1,526 synthetic CDOs worldwide sold default protection on Seattle-based WaMu, S&P said in a statement.
Default Swaps
Sellers of credit-default swap protection must pay the buyer face value in exchange for the underlying securities or the cash equivalent after a bankruptcy filing.
WaMu started as the Washington National Building Loan & Investment Association on Sept. 25, 1889, 119 years to the day before its failure. A fire had engulfed downtown Seattle and residents needed a safe place to put their money, according to a history on WaMu's Web site.
Like others at now-struggling financial institutions, WaMu pushed at the height of the housing boom into riskier loans to less creditworthy buyers. WaMu was the second-biggest provider of payment-option adjustable-rate mortgages, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance.
Option ARMS let borrowers skip part of their payment and add that sum to the principal, so that when housing prices fall, as they have since 2006, they might end up owing more than the residence is worth.
To contact the reporter on this story: Christopher Scinta in New York bankruptcy court at [email protected]
Last Updated: September 27, 2008 01:15 EDT
 
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