Update: JPMorgan Buys WaMu

[Last updated 9/26 2:15 p.m.] Washington Mutual's collapse is JPMorgan's gain. In the latest stage of Wall Street's financial crisis, last night, JPMorgan Chase bought all the deposits, assets and certain liabilities of Washington Mutual from the FDIC for $1.9 billion, marking its second major financial institution acquisition of the year after its March purchase of Bear Stearns.

Update: Although JPMorgan Chase said it plans to complete most systems integrations for the two firms and by year-end 2010, this promise may be undeliverable, said Christine Barry, Research Director at Aite Group, in an interview this afternoon. "While most banks strive to fully integrate their systems with the other bank after a merger, the reality is that most continue to run the two banks systems simultaneously (especially the back end core systems) for several years, despite the appearance of integrated systems on the front-end," she said. "For that reason, I am skeptical that these two banks will achieve full integration by 2010. Large banks like JPMorgan and WaMu have hundreds of systems running and any integration effort not completed flawlessly risks inconvenience or alienation of a customer -- something banks want to avoid at all costs. Most perform the migrations one product area at a time to lower the risk."

The impact on bank employees will also be a challenge, Barry said. "People often don't like change and migrating them over to an unfamiliar system can be stressful and lead to dissatisfaction. Banks must have bank-wide communication and be very verbal about the benefits of the new systems to limit resistance. Training will also be necessary."

Overall, the transaction will give JPMorgan a flood of new deposits and branches in states like Florida where the firm has wanted to increase its presence for years. JPMorgan Chase now has combined deposits of $911 billion and $1,433 billion in mortgage loans. This acquisition expands its consumer branch network into the states of California, Florida and Washington and increases its presence in Georgia, Idaho, Nevada and Oregon, creating the second largest branch network in the U.S. Through the combined 5,410 branches in 23 states, JPMorgan Chase will offer business and commercial banking, credit cards, consumer loans and wealth management.

In a conference call last night, JPMorgan Chairman and CEO Jamie Dimon said, "We think this builds a great franchise for us."

The acquisition, orchestrated by the FDIC to prevent the failure of WaMu from draining the FDIC's coffers, makes JPMorgan the largest U.S. bank in terms of deposits. (JPMorgan did not buy senior unsecured debt, subordinated debt and preferred stock of Washington Mutual's banks, these remain with Washington Mutual's holding company.)

JPMorgan is also taking on some of WaMu's troubled assets. JPMorgan will be marking down the acquired loan portfolio by $31 billion. "Expect JPMorgan to work to clean up WaMu's lending portfolio," says Bart Narter, SVP of the Banking Group at Celent. JPMorgan Chase intends to raise $8 billion in additional capital this morning in connection with this transaction to improve its capital position.

Don't Blame Us, OTS Director Says

In a related development, in a conference call today, the head of WaMu's regulator, OTS Director John Reich, was asked if he feels responsible for the failure of the thrift. "We're the regulator of the institution so we have responsibility for the institution," he said. "I personally feel terrible about the failure. It's the death of a financial institution, so to speak. Even the transfer of an institution affects the lives of so many people -- customers, employees, officers and directors of the institution who devoted their lives and careers to the growth and development of the institution, shareholders who have lost their investments." He said it even affects the OTS examiners more than people realize. "Regardless of the size and location of an institution, they're deeply saddened when their efforts are unable to save an institution. I would never have imagined that what we've seen happen over the last few weeks would have occurred in our economy, that Fannie and Freddie would be in receivorship, that Bear Stearns and Lehman would disappear, that AIG would be where it is today."

The culprit, Reich said, is the housing market. "The housing market has ovbiously been under tremendous distress," he said. "WaMu was a home loan lender and had a concentration of assets in real estate related loans." His organization has been seeking permission for its institutions to have greater lending diversity.

But the OTS is not to be blamed for WaMu's downfall, Reich said. "Did we neglect WaMu? Absolutely not," he said. "We've been onsite every day...WaMu is a victim of the most severe downturn in the real estate market our country has ever seen."