Washington Mutual Inc (WaMu) has been closed by the US government, making it the biggest US bank to fail to date.
WaMu's banking assets were sold to JPMorgan Chase & Co for $1.9 billion.
Last night's seizure and sale by the US regulator is the yet another historic step in US government attempts to clean up a banking industry littered with toxic mortgage debt..
Washington Mutual, the largest US savings and loan bank, has been one of the lenders hardest hit by the credit crisis, and had already suffered from soaring mortgage losses.
Washington Mutual was shut by the federal Office of Thrift Supervision (OTS), and the Federal Deposit Insurance Corp was named receiver. This followed $16.7 billion of deposit outflows at the Seattle-based thrift since Sept 15, the OTS said.
Customers should expect business as usual today, and all depositors are fully protected, the FDIC said.
Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The largest previous US banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.
The bailout also fulfils JPMorgan Chief Executive Jamie Dimon's long-held goal of becoming a retail bank force in the western United States. It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price through a government-financed transaction.
JPMorgan expects to incur $1.5 billion of pre-tax costs, but realise an equal amount of annual savings, mostly by the end of 2010. It expects the transaction to add to earnings immediately, and increase earnings 70 cents per share by 2011.
It also plans to sell $8 billion of stock, and take a $31 billion write-down for the loans it bought, representing estimated future credit losses.
The FDIC said the acquisition does not cover claims of Washington Mutual equity, senior debt and subordinated debt holders. It also said the transaction will not affect its roughly $45.2 billion deposit insurance fund.
The transaction ends exactly 119 years of independence for Washington Mutual, whose predecessor was incorporated on September 25, 1889, "to offer its stockholders a safe and profitable vehicle for investing and lending," according to the thrift's website. This helped Seattle residents rebuild after a fire torched the city's downtown.
It also follows more than a week of sale talks in which Washington Mutual attracted interest from several suitors.
These included Banco Santander SA, Citigroup Inc, HSBC Holdings Plc, Toronto-Dominion Bank and Wells Fargo & Co, as well as private equity firms Blackstone Group LP and Carlyle Group, people familiar with the situation said.
Less than three weeks ago, Washington Mutual ousted Chief Executive Kerry Killinger, who drove the thrift's growth as well as its expansion in subprime and other risky mortgages. It replaced him with Alan Fishman, the former chief executive of Brooklyn, New York's Independence Community Bank Corp.
WaMu's board was surprised at the seizure, and had been working on alternatives, people familiar with the matter said.
More than half of Washington Mutual's roughly $227 billion book of real estate loans was in home equity loans, and in adjustable-rate mortgages and subprime mortgages that are now considered risky.
The transaction wipes out a $1.35 billion investment by David Bonderman's private equity firm TPG Inc, the lead investor in a $7 billion capital raising by the thrift in April.
A TPG spokesman said the firm is "dissatisfied with the loss," but that the investment "represented a very small portion of our assets."
Reuters