Government intervention during the subprime mortgage crisis
Encyclopedia
As a consequence of the subprime mortgage crisis, a variety of government bailouts were implemented to stabilize the financial system during late 2007 and early 2008. Governments intervened in the United States
and United Kingdom
and several other Western Europe
an countries, such as Belgium
, France
, Germany
, Ireland
, Luxembourg
, and the Netherlands
. In addition, global reform of the banking industry has been discussed, to reduce speculation. Measures include a supertax on bonuses, and a transaction tax.
as lender of the last resort on the 12 September 2007. This caused mass concern about the bank's future. The Bank of England and the UK Government both insisted that the bank was secure and would not collapse. However this failed to stop thousands of customers withdrawing around £1billion from their savings. Northern Rock
's share price plummeted and intense pressure from the media, political opposition parties and customers of Northern Rock, forced the Government to nationalize Northern Rock on 17 February 2008.
s, making them part nationalised
. Banks who take the rescue packages may have restrictions on executive pay and dividend
s to existing shareholders.
for $500 million or $2 a share, those same shares a year earlier were trading at around $150. Later, on March 24, 2008 J.P. Morgan Chase increased the offer to $1.2 billion or $10 a share and five days later the acquisition was approved. In order for deal to go through J.P. Morgan Chase required the Fed to issue a nonrecourse loan of $29 billion to Bear Stearns. This means that the loan is collateralized by mortgage debt and that the government can't go after J.P. Morgan Chase's assets if the mortgage debt collateral
becomes insufficient to repay the loan.
The bailout was taken in part to avoid a potential fire sale
of nearly U.S. $210 billion of Bear Stearns' MBS and other assets, which could have caused further devaluation in similar securities across the banking system. Chairman of the Fed, Ben Bernanke
, defended the bailout by stating that a Bear Stearns' bankruptcy would have affected the real economy and could have caused a "chaotic unwinding" of investments across the US markets.
was the largest savings and loan association
in the Los Angeles
area and the seventh largest mortgage
originator in the United States.
The failure of IndyMac Bank on July 11, 2008, was the fourth largest bank failure
in United States
history, and the second largest failure of a regulated thrift
. IndyMac Bank's parent corporation was IndyMac Bancorp until the FDIC seized IndyMac Bank.
The Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), two large government-sponsored enterprises, are the two largest single mortgage backing entities in the United States. Between the two corporations, they back nearly half of the $12 trillion mortgages outstanding as of 2008. During the mortgage crises, some in the investment community feared the corporations would run out of capital. Both corporations insisted that they were financially solid, with sufficient capital to continue their businesses, but stock prices in both corporations dropped steadily nonetheless.
Given their size and key role in the US housing market, it had long been speculated that the US Government would take action to bolster both companies in such a situation. On 30 July 2008, this speculation became reality when President Bush signed the Housing and Economic Recovery Act of 2008
. While analysts disagreed on the financial need for such a bailout, the investor confidence provided by an explicit government show of support was likely needed in any case.
On 5 September 2008, the Treasury Department confirmed that both Fannie Mae and Freddie Mac would be placed into conservatorship
with the government taking over management of the pair.
by some News outlets,
the 94 year-old Merrill Lynch
agreed to be acquired by Bank of America
for $50 billion.
Also on that day Lehman Brothers
, facing a refusal by the federal government to bail it out, filed
for Chapter 11 bankruptcy protection. Treasury Secretary Hank Paulson cited moral hazard
as a reason for not bailing out Lehman Brothers.
and JP Morgan Chase tried but failed to raise $70 billion to lend AIG
.
One day later, The Fed found itself forced to bail out insurance giant AIG by providing an emergency credit liquidity facility of up to $85 billion,
which will be repaid by selling off assets of the company.
After concluding that a disorderly failure of AIG could worsen the current financial and economic crisis,
and at the request of AIG, the Fed intervened, after AIG had demonstrated that it could not obtain financing from any source. The Federal Reserve required a 79.9 percent equity stake as a fee for service and to compensate for the risk of the loan to AIG.
declared bankruptcy on September 26, 2008. The 120 year old company, one of the largest banking institutions in the US West, was driven into bankruptcy by the subprime crises. On the previous day, September 25, 2008, the United States Office of Thrift Supervision
(OTS) announced that it closed the holding company's primary operating subsidiary, Washington Mutual Savings Bank, and had placed it into the receivership
of the Federal Deposit Insurance Corporation
(FDIC). The FDIC sold the assets, all deposit accounts, and secured liabilities to JPMorgan Chase, but not unsecured debt or equity obligations.
Washington Mutual Savings Bank's closure and receivership
is the largest U.S. bank failure in history.
Kerry Killinger, the CEO from 1988 to August 2008, had been fired by the board of directors. Virtually all savings and checking account holders were not affected as the accounts were insured by the FDIC during the collapse, and subsequently transferred in whole to JPMorgan Chase. The holding company, Washington Mutual Inc was left without its major asset and equity investment, its former subsidiary Washington Mutual Savings Bank, and filed for bankruptcty the following day, the 26th.
WaMu's collapse is the largest U.S. bank failure in history.
in an all-stock transaction, scheduled to be consummated by December 31, 2008. The transaction "open bank" was facilitated by the FDIC and with the concurrence of the United States Department of the Treasury
, and the Board of Governors of the Federal Reserve Bank. The FDIC guaranteed to Citigroup to cover any losses on the Wachovia banking portfolio greater than $42 billion, in exchange for $10 billion in preferred stock.
However, Wachovia was eventually sold to Wells Fargo
without government assistance, voiding the Citibank deal.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and several other Western Europe
Western Europe
Western Europe is a loose term for the collection of countries in the western most region of the European continents, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a geographic entity—the region lying in the...
an countries, such as Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
, Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
, and the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
. In addition, global reform of the banking industry has been discussed, to reduce speculation. Measures include a supertax on bonuses, and a transaction tax.
Summary
- Northern RockNorthern RockNorthern Rock plc is a British bank, best known for becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of England for a loan facility, to replace money market funding, during the credit crisis in 2007. Having failed to find a commercial buyer for...
, encountering difficulty obtaining the credit it required to remain in business, was nationalized on 17 February 2008. As of 8 October 2008, United Kingdom taxpayer liability arising from this takeover had risen to £87 billion ($150 billion). - Bear StearnsBear StearnsThe Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
was acquired by J.P. Morgan Chase in March 2008 for $1.2 billion. The sale was conditional on the Fed's lending Bear Sterns US$29 billion on a nonrecourse basis. - IndyMac Bank, America's leading Alt-A originator in 2006 with approximately $32 billion in deposits was placed into conservatorshipConservatorshipConservatorship is a legal concept in the United States of America, where an entity or organization is subjected to the legal control of an external entity or organization, known as a conservator. Conservatorship is established either by court order or via a statutory or regulatory authority...
by the Federal Deposit Insurance CorporationFederal Deposit Insurance CorporationThe Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) on July 11, 2008, citing liquidity concerns. A bridge bankBridge bankIn the United States law of banking regulation, a bridge bank is a temporary bank organized by federal bank regulators to administer the deposits and liabilities of a failed bank...
, IndyMac Federal Bank, FSB, was established under the control of the FDIC. - The GSEs Fannie Mae and Freddie Mac were both placed in conservatorship in September 2008. The two GSE's guarantee or hold mortgage backed securities(MBS), mortgages and other debt with a Notional value of more than $5 trillion.
- Merrill LynchMerrill LynchMerrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
was acquired by Bank of AmericaBank of AmericaBank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
in September 2008 for $50 billion. - Scottish banking group HBOSHBOSHBOS plc is a banking and insurance company in the United Kingdom, a wholly owned subsidiary of the Lloyds Banking Group having been taken over in January 2009...
agreed on 17 September 2008 to an emergency acquisition by its UK rival Lloyds TSBLloyds TSBLloyds TSB Bank Plc is a retail bank in the United Kingdom. It was established in 1995 by the merger of Lloyds Bank, established in Birmingham, England in 1765 and traditionally considered one of the Big Four clearing banks, with the TSB Group which traces its origins to 1810...
, after a major decline in HBOS's share price stemming from growing fears about its exposure to British and American MBSs. The UK government made this takeover possible by agreeing to waive its competition rules. - Lehman BrothersLehman BrothersLehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
declared bankruptcy on 15 September 2008, after the Secretary of the Treasury Henry PaulsonHenry PaulsonHenry Merritt "Hank" Paulson, Jr. is an American banker who served as the 74th United States Secretary of the Treasury. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs.-Early life and family:...
, citing moral hazardMoral hazardIn economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
, refused to bail it out. - AIGAIGAIG is American International Group, a major American insurance corporation.AIG may also refer to:* And-inverter graph, a concept in computer theory* Answers in Genesis, a creationist organization in the U.S.* Arta Industrial Group in Iran...
received an $85 billion emergency loan in September 2008 from the Federal Reserve. which AIG is expected to repay by gradually selling off its assets. In exchange, the federal governmentFederal government of the United StatesThe federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
acquired a 79.9% equity stake in AIG. AIG may eventually cost U.S. taxpayers nearly $250 billion, due to its critical position insuring the toxic assets of many large international financial institutions through credit default swaps. - Washington MutualWashington MutualWashington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
(WaMu) was seized in September 2008 by the USA Office of Thrift SupervisionOffice of Thrift SupervisionThe Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
(OTS). Most of WaMu's untroubled assets were to be sold to J.P. Morgan Chase. - British bank Bradford & BingleyBradford & BingleyBradford & Bingley plc is a British bank with headquarters in the West Yorkshire town of Bingley. In 2008, partly due to the credit crunch, the bank was nationalised and in effect split into two parts; the mortgage book remained with the now publicly owned Bradford & Bingley plc, and the deposits...
was nationalised on 29 September 2008 by the UK government. The government assumed control of the bank's £50 billion mortgage and loan portfolio, while its deposit and branch network are to be sold to Spain's Grupo SantanderGrupo SantanderThe Santander Group is a banking group centered on Banco Santander, S.A., the largest bank in the Eurozone and one of the largest banks in the world in terms of market capitalisation. According to Forbes Magazine Global 2000, it is the 13th largest public company in the world...
. - In October 2008, the Australian government announced that it would make AU$4 billion available to nonbank lenders unable to issue new loans. After discussion with the industry, this amount was increased to AU$8 billion.
- In November 2008, the U.S. government announced it was purchasing $27 billion of preferred stock in CitigroupCitigroupCitigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
, a USA bank with over $2 trillion in assets, and warrantWarrant (finance)In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date....
s on 4.5% of its common stock. The preferred stock carries an 8% dividend. This purchase follows an earlier purchase of $25 billion of the same preferred stock using Troubled Asset Relief Program (TARP) funds.
Northern Rock
Northern Rock had difficulty finding finance to keep the business going and approached the Bank of EnglandBank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
as lender of the last resort on the 12 September 2007. This caused mass concern about the bank's future. The Bank of England and the UK Government both insisted that the bank was secure and would not collapse. However this failed to stop thousands of customers withdrawing around £1billion from their savings. Northern Rock
Northern Rock
Northern Rock plc is a British bank, best known for becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of England for a loan facility, to replace money market funding, during the credit crisis in 2007. Having failed to find a commercial buyer for...
's share price plummeted and intense pressure from the media, political opposition parties and customers of Northern Rock, forced the Government to nationalize Northern Rock on 17 February 2008.
Bank rescue package
Banks that are short of capital can ask to be rescued. The government has used tax payer's money to buy shares in the bankBank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s, making them part nationalised
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
. Banks who take the rescue packages may have restrictions on executive pay and dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s to existing shareholders.
Bonus Supertax
In December 2009, the United Kingdom announced a supertax on banking bonuses, in order to reduce the risk of further crises in the banking sector.Bear Stearns
On March 16, 2008, J.P. Morgan Chase announced that it would buy Bear StearnsBear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
for $500 million or $2 a share, those same shares a year earlier were trading at around $150. Later, on March 24, 2008 J.P. Morgan Chase increased the offer to $1.2 billion or $10 a share and five days later the acquisition was approved. In order for deal to go through J.P. Morgan Chase required the Fed to issue a nonrecourse loan of $29 billion to Bear Stearns. This means that the loan is collateralized by mortgage debt and that the government can't go after J.P. Morgan Chase's assets if the mortgage debt collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
becomes insufficient to repay the loan.
The bailout was taken in part to avoid a potential fire sale
Fire sale
A fire sale is the sale of goods at extremely discounted prices, typically when the seller faces bankruptcy or other impending distress. The term may originally have been based on the sale of goods at a heavy discount due to fire damage...
of nearly U.S. $210 billion of Bear Stearns' MBS and other assets, which could have caused further devaluation in similar securities across the banking system. Chairman of the Fed, Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
, defended the bailout by stating that a Bear Stearns' bankruptcy would have affected the real economy and could have caused a "chaotic unwinding" of investments across the US markets.
Independent National Mortgage Corporation (IndyMac)
Before its failure , the Independent National Mortgage Corporation (Indymac)was the largest savings and loan association
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
in the Los Angeles
Los Ángeles
Los Ángeles is the capital of the province of Biobío, in the commune of the same name, in Region VIII , in the center-south of Chile. It is located between the Laja and Biobío rivers. The population is 123,445 inhabitants...
area and the seventh largest mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
originator in the United States.
The failure of IndyMac Bank on July 11, 2008, was the fourth largest bank failure
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
in United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
history, and the second largest failure of a regulated thrift
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
. IndyMac Bank's parent corporation was IndyMac Bancorp until the FDIC seized IndyMac Bank.
Fannie Mae and Freddie Mac
The Federal National Mortgage Association
Federal National Mortgage Association
The Federal National Mortgage Association , commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal. It is a government-sponsored enterprise , though it has been a publicly traded company since 1968...
(Fannie Mae) and the Federal Home Loan Mortgage Corporation
Federal Home Loan Mortgage Corporation
The Federal Home Loan Mortgage Corporation , known as Freddie Mac , is a public government sponsored enterprise , headquartered in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia....
(Freddie Mac), two large government-sponsored enterprises, are the two largest single mortgage backing entities in the United States. Between the two corporations, they back nearly half of the $12 trillion mortgages outstanding as of 2008. During the mortgage crises, some in the investment community feared the corporations would run out of capital. Both corporations insisted that they were financially solid, with sufficient capital to continue their businesses, but stock prices in both corporations dropped steadily nonetheless.
Given their size and key role in the US housing market, it had long been speculated that the US Government would take action to bolster both companies in such a situation. On 30 July 2008, this speculation became reality when President Bush signed the Housing and Economic Recovery Act of 2008
Housing and Economic Recovery Act of 2008
The Housing and Economic Recovery Act of 2008 designed primarily to address the subprime mortgage crisis. It authorized the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed rate mortgages for subprime borrowers if lenders write-down principal loan balances to 90...
. While analysts disagreed on the financial need for such a bailout, the investor confidence provided by an explicit government show of support was likely needed in any case.
On 5 September 2008, the Treasury Department confirmed that both Fannie Mae and Freddie Mac would be placed into conservatorship
Conservatorship
Conservatorship is a legal concept in the United States of America, where an entity or organization is subjected to the legal control of an external entity or organization, known as a conservator. Conservatorship is established either by court order or via a statutory or regulatory authority...
with the government taking over management of the pair.
Lehman Brothers, Merrill Lynch & Co. and AIG
Lehman Brothers and Merrill Lynch
On September 15, 2008, a day which has been dubbed Meltdown MondayMeltdown Monday
Meltdown Monday is a term used by some financial news outlets to describe Mondays with large losses in financial markets. In the late 1980s and early 1990s, the term was used most often in reference to October 19, 1987, which later became known as Black Monday 1987...
by some News outlets,
the 94 year-old Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
agreed to be acquired by Bank of America
Bank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
for $50 billion.
Also on that day Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
, facing a refusal by the federal government to bail it out, filed
Bankruptcy of Lehman Brothers
Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S...
for Chapter 11 bankruptcy protection. Treasury Secretary Hank Paulson cited moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
as a reason for not bailing out Lehman Brothers.
American International Group
Meanwhile Goldman SachsGoldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
and JP Morgan Chase tried but failed to raise $70 billion to lend AIG
AIG
AIG is American International Group, a major American insurance corporation.AIG may also refer to:* And-inverter graph, a concept in computer theory* Answers in Genesis, a creationist organization in the U.S.* Arta Industrial Group in Iran...
.
One day later, The Fed found itself forced to bail out insurance giant AIG by providing an emergency credit liquidity facility of up to $85 billion,
which will be repaid by selling off assets of the company.
After concluding that a disorderly failure of AIG could worsen the current financial and economic crisis,
and at the request of AIG, the Fed intervened, after AIG had demonstrated that it could not obtain financing from any source. The Federal Reserve required a 79.9 percent equity stake as a fee for service and to compensate for the risk of the loan to AIG.
Washington Mutual
The Seattle based bank holding company Washington MutualWashington Mutual
Washington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
declared bankruptcy on September 26, 2008. The 120 year old company, one of the largest banking institutions in the US West, was driven into bankruptcy by the subprime crises. On the previous day, September 25, 2008, the United States Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
(OTS) announced that it closed the holding company's primary operating subsidiary, Washington Mutual Savings Bank, and had placed it into the receivership
Receivership
In law, receivership is the situation in which an institution or enterprise is being held by a receiver, a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights." The receivership remedy is an equitable remedy that emerged in...
of the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC). The FDIC sold the assets, all deposit accounts, and secured liabilities to JPMorgan Chase, but not unsecured debt or equity obligations.
Washington Mutual Savings Bank's closure and receivership
Receivership
In law, receivership is the situation in which an institution or enterprise is being held by a receiver, a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights." The receivership remedy is an equitable remedy that emerged in...
is the largest U.S. bank failure in history.
Kerry Killinger, the CEO from 1988 to August 2008, had been fired by the board of directors. Virtually all savings and checking account holders were not affected as the accounts were insured by the FDIC during the collapse, and subsequently transferred in whole to JPMorgan Chase. The holding company, Washington Mutual Inc was left without its major asset and equity investment, its former subsidiary Washington Mutual Savings Bank, and filed for bankruptcty the following day, the 26th.
WaMu's collapse is the largest U.S. bank failure in history.
Wachovia
Wachovia Corp., the fourth biggest US bank by assets, agreed on September 29, 2008 to divest all of its banking subsidiaries to CitiGroupCitigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
in an all-stock transaction, scheduled to be consummated by December 31, 2008. The transaction "open bank" was facilitated by the FDIC and with the concurrence of the United States Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
, and the Board of Governors of the Federal Reserve Bank. The FDIC guaranteed to Citigroup to cover any losses on the Wachovia banking portfolio greater than $42 billion, in exchange for $10 billion in preferred stock.
However, Wachovia was eventually sold to Wells Fargo
Wells Fargo
Wells Fargo & Company is an American multinational diversified financial services company with operations around the world. Wells Fargo is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo is the second largest bank in deposits, home...
without government assistance, voiding the Citibank deal.