As lawmakers struggle to nail down the details of a historic bailout proposal, troubled thrift Washington Mutual (WM) was closed by regulators on Thursday night, the victim of a huge bet on mortgages gone south. The Federal Deposit Insurance Corporation seized the failed bank and sold the company’s banking assets to JP Morgan Chase & Co. (JPM) for just $1.9 billion; the sales price is stunning, given WaMu’s combined assets of $307 billion and total deposits of $188 billion. “The housing market downturn had a significant impact on the performance of WaMu’s mortgage portfolio and led to three straight quarters of losses totaling $6.1 billion,” said Office of Thrift Supervision director John Reich. The thrift regulator said it that “WaMu was in an unsafe and unsound condition to transact business,” and that the bank saw depositors yank $16.7 billion in deposits since Sept. 15. The deal averted a potentially huge hit to the FDIC’s deposit insurance fund, with the FDIC saying that JP Morgan’s cash payment insulated the fund from any losses. “WaMu’s balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses,” FDIC chairman Sheila Bair said. “For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks,” said FDIC Chairman Sheila C. Bair. “For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning.” JP Morgan did not assume WaMu’s liabilities, including claims by equity or any senior or subordinated debt holders, but it did agree to absorb WaMu’s troublesome loan portfolio, likely the reason for the fire-sale price; WaMu has more than 43,000 employees and more than 2,200 branch offices in 15 states. The deal makes JP Morgan into the largest U.S. bank by deposits. WaMu’s $231.1 billion loan portfolio at the end of Q2 included $52.9 billion in option ARMs and another $62.5 billion in home equity loans and lines of credit. Total nonperforming assets jumped to $11.2 billion at the end of the second quarter, as well, up 22 percent from the first quarter and nearly three times the NPAs recorded one year earlier. JP Morgan said it would write down WaMu’s loan portfolio by roughly $31 billion, to account for losses inherent in the book of business. It’s expected that at least some of the bad loans on WaMu’s, and now JP Morgan’s, books would be eligible for sale to the U.S. government under a plan proposed by Treasury secretary Henry Paulson last week. The specifics of that plan, however, remained in doubt Friday morning after a competing proposal from House Republicans surfaced late Thursday. WaMu had scrambled in recent weeks to avoid a failure, including opening its books to potential purchasers including Wells Fargo & Co. (WFC) and Citigroup Inc. (C), but none were willing to take on the bank’s risky loan portfolio and wanted the FDIC to manage liquidation of the “bad” bank, while acquiring the “good part of WaMu’s operations — its deposits and branches. The bank also approached private equity buyers, looking for a last-second deal, to no avail. See earlier HW coverage. With WaMu now history, many of the nation’s smaller thrifts — themselves facing the crunch of a real estate market gone bad — are likely to come into question as potential failure targets. The Wall Street Journal has a very long story about what the purchase means for JP Morgan; but it’s clear that the commercial banking giant has become a verifiable behemoth, having picked Bear Stearns & Cos. up off the mat earlier this year, with help from the Federal Reserve. Read statement by the OTS >> Read FDIC failed bank information >> Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.