September 26, 2008 / 5:17 AM / 10 years ago

U.S. bank deposit fund dodges bullet with WaMu buyer

WASHINGTON (Reuters) - The U.S. fund to insure customer deposits used for bank failures dodged a big bullet when regulators on Thursday announced that JPMorgan Chase & Co (JPM.N) agreed to buy failed mortgage lender Washington Mutual (WM.N).

Becoming the largest bank failure in U.S. history, Washington Mutual Inc was acquired in a transaction that did not dent the Deposit Insurance Fund, which stood at about $45 billion at the end of June, or incur costs to the taxpayer.

“I think this institution was a big question mark for a lot of people about the health of the deposit insurance fund,” Federal Deposit Insurance Corp Chairman Sheila Bair said during a telephone call with reporters.

Fears were mounting that a big bank failure could devastate the reserve at a time when public confidence in banks was eroding as one big U.S. financial firm after another was spiraling downward.

The FDIC fund is used to insure up to $100,000 per account per depositor and $250,000 per Individual Retirement Account at insured banks.

As concerns surrounding WaMu increased, Bair repeatedly said that she remained confident that the fund had ample amounts to deal with future bank insolvencies. She doubted that the FDIC would have to tap into the Treasury’s coffers for short- and long-term lines of credit totaling $70 billion.

It also can raise banks’ premiums to replenish the fund.

“This was the big one that everybody was worried about,” she said. “I was worried about it. It was resolved successfully without taxpayer costs, without cost to the taxpayer insurance fund, and depositors — insured and uninsured — were protected.”

Bair said WaMu was under severe liquidity stress and was facing credit rating downgrades and therefore was placed on the FDIC’s problem bank list for the third quarter.

The transaction is not subject to any regulatory reviews in terms of regional concentrations, largely due to regulatory flexibility granted to failing institutions, she said.


WaMu, which operated under a thrift charter, was regulated by the Office of Thrift Supervision (OTS). Its charter will be folded into JPMorgan’s national bank charter regulated by the Office of the Comptroller of the Currency (OCC).

The loss of WaMu creates an uncertainty for the future of the OTS as it loses a big source of revenue. The Treasury Department has suggested that the OTS be combined with the OCC.

The announcement came as the Bush administration and lawmakers try to hammer out a deal to provide $700 billion to rescue troubled financial institutions mired in illiquid assets.

U.S. lawmaker said reforming the regulatory structure of financial institutions will be a one of the top priorities on the agenda in the next Congress.

At around the time a bank might fail, the FDIC tries to find buyers of both the deposits and assets in a secretive auction process that requires confidentially agreements from potential bidders.

Bair said that after an open process to find a buyer failed, the FDIC on Wednesday used its secretive pre-resolution auction process, which ended up attracting four banks including JPMorgan. The others were not named.

Normally the announcement would have been made on Friday to give agency staff the weekend to transition the bank into its new owner but because media leaks were continually fueling customer anxiety regulators acted sooner.

“It has been a gradual process,” she said. “It’s been on our radar screen for some time. It came to a head this week with a very, very severe liquidity problem.”

Bair reiterated that there will be more bank failures but the number will nowhere near the number seen during the savings and loans crisis more than a decade ago.

“I think the number of failures is still going to be low by S&L standards.”

Editing by Jan Dahinten

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