Washington Mutual Was the Largest Bank Failure in American History
A thrift with more than three hundred billion dollars in assets was seized in September 2008 and sold the same day. Depositors experienced no interruption at all.
The Failure
Washington Mutual was a large savings institution with assets above three hundred billion dollars. In September 2008, following a severe deposit outflow over several days, regulators closed it and sold the banking operations to JPMorgan Chase.
It remains the largest bank failure in United States history by assets.
What Caused It
The asset side was the origin. The institution had expanded aggressively in mortgage lending, including option adjustable rate mortgages that allowed borrowers to make payments smaller than the interest accruing, with the shortfall added to principal.
Those products perform while house prices rise, because borrowers can refinance or sell. When prices fall, borrowers owe more than they originally borrowed on a property worth less than the loan, and defaults follow rapidly.
A loan where the balance grows while the collateral falls is not a mortgage with elevated risk. It is a structure that requires appreciation to function at all.
The Run
The proximate cause of failure was funding. Following Lehman's collapse and the broader panic, depositors withdrew a very large sum over a short period.
As with other failures in this series, the institution died from the liability side. The bad loans made it vulnerable and the deposit outflow determined the timing.
The Resolution Mechanism
The mechanics deserve attention because they worked well. The FDIC seized the institution and simultaneously sold the deposits and branches to an acquirer, executing over a weekend.
Depositors experienced continuity. Accounts remained accessible, branches opened normally, and no insured depositor lost money. From a customer perspective the institution changed name and nothing else occurred.
That is what a functioning resolution regime is supposed to deliver, and it stands in contrast to the disorderly outcomes elsewhere in the same period.
Who Bore the Losses
The losses fell on shareholders, who were wiped out, and on holders of the holding company's debt, who recovered little. The acquirer purchased the banking operations without assuming those obligations.
Bondholders objected strongly and litigation followed for years. Their argument was that the resolution had transferred value to the acquirer at their expense.
The counterargument is that this is precisely what the resolution framework is designed to do. Creditors of a failing bank are meant to absorb losses so that depositors and the insurance fund do not.
The Contrast Worth Noting
The comparison with the same period is instructive. Lehman's disorderly bankruptcy caused enormous disruption because no resolution regime applied to it. WaMu, a larger institution by assets, was resolved over a weekend with no visible disruption because a regime existed.
That difference drove the creation of resolution authority for large non bank financial institutions in subsequent legislation.
The Bottom Line
WaMu was larger than Lehman and failed invisibly because a resolution regime existed. The framework determines whether a failure is an event or a headline.