This Time, WaMu May Have To Say Yes To Chase

Earlier this year, New York-based JP Morgan Chase tried to acquire the sagging Washington Mutual in an all-stock deal worth $8 per share. At the time, WaMu's CEO Kerry Killinger's reply to Chase leader Jamie Dimon was your basic, "thanks, but no thanks."

Apparently, Killinger was betting that an infusion of capital from private investors, coupled with an easing of the mortgage lending crisis that crippled WaMu's earnings and capital reserves, would allow the Seattle-based lender to remain independent. It would also help Killinger keep his CEO office.

Killinger guessed wrong, especially about job security because he was ousted a few days ago. More troubling, his former company looks like it's coming in for a crash landing, prompting increased speculation that WaMu must soon be saved-- either through a federal bailout, a merger with another bank, or some combination of the two.

No matter what, WaMu may have to swallow hard and try to renegotiate with Dimon, who was disappointed at that earlier rejection.

WaMu is not dealing from a position of strength because it's woes have ballooned since JP Morgan's March overture. In the second quarter, WaMu suffered its biggest loss ever. And it's staggering under $44 billion in debt due this year, with another $43 billion due over the next few years. WaMu's stock is now trading below $2 a share--far south of that estimated $8-per-share it turned down from Chase and it's 52-week high of nearly $39 per share. Yet beneath those financial ailments beats a viable consumer lending franchise.

Lucky for WaMu, Dimon is determined to turn Chase into a national retail banker and keep pace with major competitor Bank of America, which in recent years spent $21 billion to acquire Chicago-based LaSalle National Bank and another $4 billion buying rickety California-based mortgage lender Countryside Financial.
To take on BofA, Chase must bulk up it's retail banking side by adding customers, checking accounts, branches and ATMs in major West Coast and selected Midwest markets. In short, regions where WaMu already has a presence.

That doesn't mean Dimon is going to give up the store to buy WaMu, especially as it's financial situation becomes more dire and there's increased speculation that federal regulators may have to lend a helping hand.

Dimon knows how that game is played. Working with the Federal Reserve and U.S. Treasury, Chase was able to bail out the near-insolvent Bear Stearns & Co. , once the fifth largest investment bank, for only $10 per share. He tried to buy it for $2 per share, until the backlash from Bear investors forced him to sweeten his bid.

For WaMu, decision time is fast approaching and the lender may find that its savior is that once-rejected suitor, JP Morgan Chase.