How Lehman Brothers Took Out Washington Mutual

WaMu depositors ran for the exits after Lehman filed for bankruptcy.

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Although Washington Mutual already had its hands full with a struggling mortgage portfolio—posting a $3.3 billion loss last quarter alone—it was a deposit run sparked by the bankruptcy of investment bank Lehman Brothers that led to the collapse of the Seattle-based banking company.

Federal regulators closed down WaMu and announced an agreement to sell most of its operations to JPMorgan for just under $2 billion on Thursday. The downfall of the $307 billion-asset WaMu represents the largest banking failure in U.S. history, dwarfing the 1984 failure of the $40 billion-asset Continental Illinois, which had previously held the distinction.

On Thursday, the Office of Thrift Supervision—which had been WaMu's primary regulator—issued the following statement on the events leading up to the collapse.

Pressure on WaMu intensified in the last three months as market conditions worsened. An outflow of deposits began on September 15, 2008, totaling $16.7 billion. With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business. The OTS closed the institution and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC held the bidding process that resulted in the acquisition by JPMorgan Chase.

Lehman's bankruptcy—which was filed on September 15—apparently spooked depositors enough to convince them that WaMu was next. As such, they began pulling their cash, sealing the troubled company's fate.

Still, as Meredith Whitney of Oppenheimer pointed out in a report Friday, depositors had already begun limiting their exposure to the WaMu as its weakness became increasingly apparent.

From Oppenheimer:

The flight of deposits from WM accelerated previous trends of depositors withdrawing uninsured deposits from the company. Below we present WM's estimated uninsured deposits, calculated as a sum of its underlying regulatory institutions, through 2Q08. We note that the underlying institutions do not sum up to WM's total reported deposits, but the below data is our best estimate of WM's uninsured deposit base.

Here's the trend, from Oppenheimer:

                  Underlying Uninsured Percent of Deposits Uninsured Deposits
1Q06 72.4 35.3%
2Q06 72.2 34.2%
3Q06 68.8 31.8%
4Q06 73.4 33.4%
1Q07 68.6 32.0%
2Q07 62.7 30.7%
3Q07 57.3 29.0%
4Q07 48.4 25.8%
1Q08 46.6 24.2%
2Q08 45.1 23.4%

Note: Insured available deposits and uninsured deposits data are FDIC totals of the banks' underlying institutions. Although the sum of the underlying institutions deposits does not equal the deposits reported by the bank holding company, it is our best estimate as to the uninsured/insured split, as bank holding companies do not report this data. Sources: FDIC, OTS, SNL Financial, and Oppenheimer & Co. Inc.