Sept. 26 (Bloomberg) -- Washington Mutual Inc. was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co. in the biggest U.S. bank failure in history.

WaMu became ``unsound'' after customers withdrew $16.7 billion since Sept. 16, the Office of Thrift Supervision said yesterday. Branches are open today and depositors have full access to their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said.

The failure of WaMu, which has $188 billion in deposits, ratchets up pressure on lawmakers to piece together a rescue package for the nation's financial system. The government's inability yesterday to reach agreement on a bailout and the seizure of the biggest savings and loan sparked a sell-off of bank stocks, led by a 27 percent tumble in Wachovia Corp.

``We are going to see a lot more bank failures before the cycle is all over,'' said Brian Horey, president of Aurelian Management LLC in New York, which had bet on a decline in Washington Mutual before a ban on such so-called short sales was imposed. ``There are sufficiently large clusters of bad assets on a fair range of banks out there.''

Wachovia, the biggest seller of option adjustable-rate mortgages, slumped $3.70 to $10 in composite trading on the New York Stock Exchange. National City Corp., Ohio's largest bank, fell 26 percent, while Citigroup Inc., the biggest U.S. bank by assets, rose 3.8 percent.

Different Model

Kristen Baird Adams, a spokeswoman for National City, said the bank has ``an entirely different business model'' than WaMu. Wachovia's Christy Phillips-Brown said the bank ``continued to operate well relative to our competition.''

WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week. WaMu fired CEO Kerry Killinger on Sept. 8 and replaced him with Alan Fishman, who was awarded a $7.5 million signing bonus and $1 million salary.

JPMorgan Chief Executive Officer Jamie Dimon declined to comment on Fishman's pay on a conference call with reporters today. Fishman is an employee of the bank-holding company, which isn't being acquired, he said.

JPMorgan will make a $1.9 billion payment to the FDIC as part of the acquisition, which makes the company the biggest U.S. bank by deposits.

`Fabulous Franchise'

``This is a fabulous franchise,'' Dimon, 52, said in an interview yesterday. ``We think we got this at a price that protects us, where if we were wrong, it still protects us.''

The bank won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said.

JPMorgan saw ``no price'' at which it would have made a bid for the entire bank, Dimon said today on a conference call with reporters.

WaMu is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the hastily arranged rescues of Merrill Lynch & Co. by Bank of America Corp. and of Bear Stearns Cos., which was also absorbed by JPMorgan. WaMu in March rejected a takeover offer from JPMorgan that the savings and loan valued at $4 a share.

WaMu Shares

In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 16 cents on the New York Stock Exchange.

Bondholders are likely to lose most of their money after the seizure, CreditSights Inc. said.

``It seems that WaMu's major debt holders have been stranded by regulatory intervention,'' David Hendler, an analyst at the bond-research firm in New York, wrote in a report today. ``The deal structure seems to be unprecedented in that it excludes bondholders at the holding-company and bank levels from the major assets and liabilities of the operating bank.''

New York-based JPMorgan said today it sold $10 billion of shares at $40.50 apiece to raise capital. The bank rose $4.78, or 11 percent, to $48.24 in composite trading at 4:10 p.m.

JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said.

The extent of job cuts aren't yet known, Charles Scharf, CEO of JPMorgan's retail bank, said today on the call with reporters. The bank plans to consolidate about 10 percent of the overlapping branches in locations including Illinois, Texas and New York.

`Bid to Win'

JPMorgan had 75 people involved in the transaction and ``bid to win'' because it wanted WaMu's assets, Dimon said on a conference call yesterday. JPMorgan used its own investment bank to value the mortgages, he said.

Dimon also said on the conference call that he's in favor of the government's proposed $700 billion plan to prop up the banking industry, but didn't rely on it to complete the deal. The plan was jeopardized yesterday as congressional Republicans failed to agree on its details.

JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said.

Citigroup Inc., which had been among five potential acquirers, elected not to bid for WaMu because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.

Earnings Forecast

The acquisition may add 50 cents a share to earnings in 2009, JPMorgan said in a statement yesterday. The firm said it may save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges.

WaMu had about 2,300 branches at the end of June. Its $310 billion of assets dwarf those of Continental Illinois National Bank and Trust, previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

David Franklin, a health insurance agent in Los Angeles, knows his money is protected and that it's being transferred to JPMorgan. Still, he was closing a $30,000 joint account today with his wife at WaMu and planning to transfer it to Wells Fargo & Co., where he has other deposits.

``It's the element of the unknown,'' said Franklin, 33, while standing in line at a WaMu branch in Beverly Hills. ``I'd just rather be safe than sorry.''

TPG Investment

WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debt-holder, Bloomberg data show. David Bonderman's TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment.

WaMu was the second-biggest provider of option ARMs, behind Wachovia, with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006.

Killinger, WaMu's ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.

Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.

Subprime Rout

Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans.

``There's a lot of sadness and a lot of people are hurt,'' Lee Lannoye, 71, who was chief credit officer at WaMu from 1988 to 1998, said yesterday. ``Having worked with Kerry Killinger for 10 years, I still absolutely cannot fathom where or why he went wrong, and what caused him to lead the company into taking the kinds of risks that they did.''

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: September 26, 2008 16:19 EDT