Fleeing WaMu deposits sent regulators scrambling

By John Poirier

WASHINGTON, Sept 26 (Reuters) - As depositors lost confidence in Washington Mutual Inc (WM.N), and began emptying their accounts, regulators abandoned hopes of saving the largest U.S. savings bank and conducted a secret auction.

"It was a full-time effort the last several weeks to do everything possible to keep the institution alive," said Washington Mutual's regulator on Friday, a day after it was seized then sold in the biggest U.S. bank failure ever.

Office of Thrift Supervision Director John Reich told reporters that the bank's liquidity was being monitored daily.

But in a span of nine days leading up to its failure, customers withdrew about $16.7 billion in deposits forcing U.S. officials to sell Washington Mutual out of receivership for just $1.9 billion to JPMorgan Chase & Co (JPM.N).

It was a sad end for the 119-year-old institution headquartered in Seattle but ended well for regulators and the public, costing nothing to the U.S. fund that insures most bank accounts up to $100,000.

Washington Mutual had been one of the lenders hardest hit by the U.S. housing bust and credit crisis, and had suffered from soaring mortgage losses.

In February its regulatory rating slipped to a 3 from a 2 on a scale that goes down to 5. That was not enough to place it on the Federal Deposit Insurance Corp's troubled bank list, but it was a portent of things to come.

As home prices continued to slide, WaMu's mortgage losses mounted.

It announced Sept. 8 it was ousting Kerry Killinger as chief executive and disclosed it had been placed under special regulatory supervision requiring improved risk management.

Investors speculated that WaMu was looking to sell itself with reports that JPMorgan, Citigroup Inc (C.N), Wells Fargo & Co (WFC.N) and some European banks were interested.

On Sept. 18, WaMu's rating slipped to a 4 and it was placed on the FDIC's watch list, a fact kept secret at the time to prevent a self-fulfilling run on the bank. A 4 rating reflects financial, operational or managerial weaknesses that threaten a bank's financial viability.

A day earlier, Texas-based private equity firm TPG said it was waiving rights under its $1.35 billion investment in WaMu that could have blocked the bank's acquisition.

But in hindsight, the time for a private sale had come and gone. By Sept. 24, WaMu's deposits had plunged 33 percent to $129 billion from $188 billion at the end of June.

FDIC Chairman Sheila Bair told reporters on Thursday that after an open process to find a buyer failed, the agency turned to its secretive auction process in which bidders place their offers on a secured website.

Four banks submitted their plans by the Wednesday due date, and the same day JPMorgan was notified it had won. The FDIC declined to name the other participating banks.