In Washington Mutual takeover, JPMorgan takes calculated risk

WASHINGTON (AP) — The government’s seizure and sale of Washington Mutual Inc. eases pressure on a federal fund that insures Americans’ bank deposits and places a high-stakes opportunity — with minimal risk — into the hands of JPMorgan Chase & Co. Inc.

U.S. taxpayers, meantime, could end up shouldering billions of dollars worth of shaky mortgages and other investments that contributed to WaMu’s demise. Such a scenario assumes the massive bailout proposed by Treasury Secretary Henry Paulson, or something like it, will be approved, and JPMorgan will sell WaMu’s least-desirable assets to the government.

For its $1.9 billion investment, JPMorgan gets control of the nation’s largest thrift — more than 5,000 branches in 23 states. It also assumes a highly stressed loan portfolio that could result in a $31 billion write-down.

While JPMorgan would be in a position to limit such a hit by taking advantage of a Paulson-like bailout plan, analysts said the bank is strong enough to shoulder the write-down on its own.

“I don’t think they need the government bailout to make WaMu work,” said Len Blum, managing director of Westwood Capital. “They have the capital, they have the strength to hold those assets and take the write down.”

Blum expects the bank to benefit from the bailout in a more indirect way — as strong banks will prosper in a more stable market environment.

During a conference call with investors Thursday night, JPMorgan Chief Executive Jamie Dimon said the government’s proposed bailout plan wasn’t a factor in the acquisition.

Some experts said that’s just not plausible.

Jim Wilcox, a finance professor at the University of California Berkeley’s Haas School of Business, said he believes JPMorgan based its acquisition of WaMu on the assumption that a bailout package such as the one proposed by Treasury Secretary Henry Paulson would pass.

Bart Narter, senior vice president of banking at Boston-based research and consulting firm Celent, said JPMorgan made a calculated risk.

“They did a little decision tree on whether the bailout will happen and how bad the situation will get and the bargain they got on the branch network, and they figured they’d pay a risk-adjusted cost for the assets they’re taking,” including the branches and mortgage-backed securities, he said.

In a booming vote of confidence in JPMorgan’s action, investors bought 246.9 million new shares on Friday at $40.50 apiece, a 7 percent discount to Thursday’s closing price of $43.46. JPMorgan raised gross proceeds of $10 billion from the offering, well above the $8 billion it had originally planned to raise.

Ultimately, though, JPMorgan has taken a gamble. There is still a risk that the bank will be forced to write down more than $31 billion on the troubled assets it acquired, said Donn Vickrey, co-founder of Gradient Analytics. “But I just think it’s a gamble worth taking and they have the capital to handle it if it does become worse,” he said.

Washington Mutual’s lucrative deposits outweigh any risk due to the write-down, Vickrey said. And, in the end, if the bank actually ends up making a little money on the loans, that’s just a bonus, he said.

For the Federal Deposit Insurance Company, the near-term financial threat posed by WaMu’s failure drove the agency to expedite a seizure and sale.

“It was unique in its size and exposure to higher risk mortgages and the distressed housing market,” Sheila Bair, the chairman of the FDIC, said in a conference call Thursday. “This is the big one that everybody was worried about.”