In what just became the largest U.S bank failure in history and the world for that matter, the Office of Thrift Supervision late Thursday 09/25/08, seized Washington Mutual (WM) and transferred control to the Federal Deposit Insurance Corporation, which then immediately sold Washington Mutual’s (WM) assets to JP Morgan Chase (JPM).

The FDIC ranks bank failures by the size of the assets of the failed banks, and Washington Mutual (WM) had $310 billion in assets. Prior to Washington Mutual (WM), the largest U.S. bank failure was Continental Illinois National Bank, which failed in 1984, with assets of $40 billion. Second in line was IndyMac, which was shut down in July of this year, with $32 billion in assets.

In a failure this size, a major concern would have been whether this would deplete the FDIC’s insurance fund, which makes whole, depositors with accounts of $100,000 or less in a failed federally regulated bank.

The fund currently has $45 billion and had it had to cover Washington Mutual’s (WM) depositors, there is a good chance that the fund would have been depleted. With JP Morgan (JPM) stepping up and taking over, that disaster was avoided, for now.

Considering the current economic environment, this won’t be the last bank failure over the next twelve months.

The bank’s problems heightened this week and it became clear that failure was inevitable. It had put itself up for auction last weekend, but was having problems finding a buyer.

Then earlier this week, Standard & Poor’s downgraded its ratings, which made a bad situation worse. The head of the FDIC, Sheila Blair, summed up the situation today when she stated that Washington Mutual (WM) “was under severe liquidity pressure.”

Customers of Washington Mutual (WM) will not incur any losses and as far as depositors are concerned, the FDIC is terming this “a combination of two banks, and that depositors can expect business as usual on Friday morning.” If anything, they’ve just been moved over to a more secure bank.

Shareholders however, will most likely be completely wiped out. Already, Washington Mutual’s shares have fallen 87.5% so this year (09/25/08 closing price) and the shares which closed at $1.69 on Thursday, are down $1.24 or 73.37% in after hours trading.

Washington Mutual  Bank Failure  Continental Illinois  WAMU