Federal regulators seize Washington Mutual and broker sale to JP Morgan
Market Highlights
Move over BOA, JP Morgan is now firmly #2
Federal regulators stepped in to take control of Washington Mutual Inc, the nation's largest savings and loan, and brokered a deal whereby the assets from the largest bank failure in US history were sold to JP Morgan for $1.9 billion. WaMu, as it is commonly referred to, was one of the most troubled firms in the current crisis, having been the nation's biggest player in sub-prime home mortgages. The extraordinary seizure and sale engineered last night were precipitated not only by the huge losses and exposures to subprime debt at WaMU but the challenges created by a shrinking deposit base. More than $16.7B of deposits have been withdrawn from the institution since September 15th.
With the acquisition of WaMu's $307 billion of assets and $188 billion of deposits, JP Morgan has vaulted itself past Bank of America to become the second largest commercial bank in the Unites States, with the largest credit card business and a vast branch network on both coasts. However, BoA will move to the top of the banking heap in the US once it completes its proposed takeover of Merrill Lynch and Co.
JP Morgan's Chief Executive and Chairman, Jaimie Dimon, has not only become Wall Street's white knight but its biggest star as well after previously engineering the acquisition of investment bank Bear Stearns at fire sale prices. The challenge now will be to take the fundamental business units of these very different organizations and indoctrinate them into the risk management culture at JP Morgan. Should that be accomplished, the acquisitions could look like one of the greatest coups in the history of modern banking in 20 years time.
Political manoeuvring threatens $700 billion bailout package
Following the failures of Bear Stearns, Freddie Mac, Fannie Mae, Lehman Brothers, AIG, WaMU, the sale of Merrill Lynch and regulatory overhaul of Goldman Sachs and Morgan Stanley, the question is not only who is next to fall but will $700B be enough to stop the bleeding. The fall of WaMu unquestionably removes a great deal of uncertainty from the system but there is still a pressing need for some form of coordinated action to instil confidence in a fragile market.
The Bush Administration's proposed bailout package meanwhile has gone from looking like a sure thing, to a slightly delayed plan with some minor tweaks to being fundamentally in jeopardy this morning. Conservative House Republicans are fuming at the thought of a bailout package for Wall Street, something that is so ideologically distasteful for them that they have broken from the Bush Administration and now represent the main opposition to any plan. Meanwhile, Democrats on the Hill are largely in favour of delivering a package provided that they can win accommodations limiting executive pay for bailed out firms and can have significant levels of government oversight. Throw in the fact that Obama and McCain are jockeying for position and a share of the credit in striking a deal and you've got all the ingredients for a day-time soap opera, though one that all of us have a vested interest in. Tune into CNBC today for the latest instalment of "As The World of Failed Bank CEOs Turns..."
Equities lower along with energy, USD higher
Confirmation of the largest bank failure in the history of the US and a listing bailout package has failed to put investors in a buying mood this morning. Global equities are lower with every major equity index in the world posting losses to this point with commodities largely taking it on the chin as well with a 4-point decline in the CRB commodity price index.
The US Dollar is rallying moderately this morning against the Pound Sterling and Euro, though it is giving back ground against the JPY, AUD and NZD. The Canadian Dollar is largely unchanged from yesterday's closing levels though USDCAD did push up a touch more than half a cent at it's highest levels overnight.
The final revision to second quarter US GDP showed that the economy didn't outperform to the same extent as originally believed. The first revision to the preliminary reading pegged economic growth at 3.3% on the quarter and while economists had expected that number to tick up to 3.4%, the final number disappointed at 2.8%. The University of Michigan Consumer Sentiment Index also disappointed investors this morning with a reading of 70.3 vs. analysts' consensus estimate of 70.9 and a prior month's reading of 73.1.
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| Mark Frey, Head Trader |
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