Washington Mutual (WM) failed yesterday and most of its assets where sold to JP Morgan (JPM). The price was $1.8 billion. JPM will have to write down $31 billion in bad loans, but, since Jamie Dimon is now the king of the banking world, he should be able to raise the capital to cover that. In the meantime, he has picked up $307 billion in assets.

According to The Wall Street Journal, "The deal will vault J.P. Morgan into first place in nationwide deposits and greatly expand its franchise." The people who get drawn-and-quartered in the process are the WaMu bondholders and those who own the common stock. Washington Mutual shares were at over $36 a year ago. Now, they are worth nothing. About $50 billion in market cap has been destroyed.

The failure, the biggest in US history, does not mean much. Depositors are protected. The beating shareholders take is no different than any other when a large company fails.The system worked well. A healthier firm got the pieces of the failed firm on the cheap. JP Morgan will be the better for the deal and when the financial markets recover, the purchase of WaMu’s assets may look like the deal of the century.

The collapse of WaMu was similar to what happened at Lehman. Outside firms including Nomura got some tremendous financial property for next to nothing. The Japanese company had the capital to do what Lehman could not. The assets which Nomura bought may be temporarily impaired, but the stronger company can wait that out

Physicists claim that energy is never lost. It simply changes from one form to another. The current banking process may show that capital acts in roughly the same way, at least over long time periods.

The purchase of WaMu’s assets again raises the issue of whether the government bailout of the financial system is necessary. Private capital has picked up the pieces of several bank and brokerage failures and the process has happened with speed and efficiency. Capital is available if the deals are good enough.

WaMu failed and, except for a relatively small number of shareholders and employees, no one should care.

Douglas A. McIntyre

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