Washington Mutual’s failure: No quick fix for banking system
By Mark Trumbull | 09.26.08
The biggest bank failure in US history happened Thursday around dinner time, and … life mostly went on as usual.
Sure, the fall of Washington Mutual is a big deal. In ordinary times, it would be easily the big news story of the day or the week.
These aren’t ordinary times.
After recent collapses of other big-name financial companies – Fannie Mae, Freddie Mac, AIG, Lehman Brothers – this seems like just another day in the credit-market crisis.
Of course, the very scale of the maelstrom has reached the point where all eyes are now on Washington, as Congress considers a rescue plan designed to contain the cascade of failures.
But the failure of Washington Mutual sends a significant signal: The banking-system problems are large and defy a quick fix.
WaMu had tried in recent days to find a private buyer, but failed. With the firm’s access to credit drying up and some depositors pulling their money out, federal bank regulators decided to act this week.
The Federal Deposit Insurance Corp. decided to seize WaMu and then arranged a quick sale of the thrift institution – good assets and bad – to JPMorgan Chase for $1.9 billion.
“For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks,” said FDIC Chairman Sheila Bair in a statement. “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.”
By moving when it did, the FDIC was able to deal with the problem without having to tap its Deposit Insurance Fund. That fund, built with premiums from banks and other institutions with federally insured deposits, is used when needed to protect depositor accounts. Individual accounts up to $100,000 are completely insured against losses when banks fail.
WaMu’s $307 billion in assets outstrip the $40 billion affected in the 1984 failure of Continental Illinois National Bank, until now the largest US bank failure. Earlier this year, IndyMac failure involved $32 billion in assets.
WaMu’s shareholders will be wiped out – as will bondholders. That shook some financial-company stocks and bonds Friday morning, as investors assessed the risks of other banks failing. One large bank that took a hit was Wachovia Corp., while some that are perceived as stronger were little affected. This doesn’t mean Wachovia will follow down the same slope as WaMu, but it has among the largest exposures to home loans in hard-hit states California and Florida, according to research by Oppenheimer & Co.
The WaMu deal allows JPMorgan to expand its reach westward. But its acquisition comes at a price. JPMorgan plans to mark down WaMu’s loan portfolio by about $31 billion – a sign of the costs the US Treasury may face if Congress gives the go-ahead for the government to buy troubled assets from banks.
At many banks there’s a gap between what they hope certain assets are worth and the reality. But the Treasury plan involves buying those assets – at a price where banks are willing to part with them – to relieve uncertainty about the health of the US banking system. The assets bought by Treasury might fare well or poorly in value, depending on the price they pay and where home prices head from here.
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2. L Rajiva | 09.26.08
I do not understand how this is a rescue?
If the FDIC takes such a big hit (20-30b) why doesn’t it get the assets? Why doesn’t it buy it for a couple of billion that would allow it to recoup some of its expenses?
3. Mike | 09.26.08
I think this was a ploy by the Bush administration to scare taxpayers and force Congress to give them a blank $700 Billion dollar check. While I know that WAMU was not super secure financially, it just seems that two hours after President Bush did not get his way, he went back to his standard practice of fear and intimidation to cause panic and make Congress act.
4. Eric | 09.26.08
Sweet, so JP Morgan, one of the perpetuators of the Great Depression of 1929, are allowed to gobble up $307B in assets from WAMU, and not have to pay anything.
These banks are the reason why the whole Housing Market Bubble occurred, and now we (US Taxpayers) are going to just give them the keys to the bank vault, and keep letting them waste our money.
5. Able Dagger | 09.26.08
Someone should do an expose article about the individual people at the head of these firms during this financial 911. It seems to me that Hank G. at AIG was also involved in events surrounding the attacks on the U.S. on September 11, 2001. How does this Alan F. CEO at Washington Mutual walk away with $20 million. The fraud is staggering and many of these gangsters seem to have one thing in common.
6. John M | 09.27.08
According to Wamu newsletter for their customers they were “proud” of the situation. Also they said that “it’s business as usual”! That’s a _little_ alarming…! They did not say a word about the bankruptcy and tried to cover the situation to a wrap saying “we are now bigger and stronger” but in reality they don’t exist anymore. How sad is that even after what happened you are afraid to tell the truth. Good thing that I was warned about the Wamu’s situation over 6 months before the bankruptcy and were able to open new accounts to another bank and moved all my savings there. I only keep couple months living worth of emergency funds on Wamu but rest is elsewhere. That’s because I learned it young don’t keep all your eggs on same basket… …like zero-down-bad-credit-first-home-buyer-mortgages…
Here’s some little-man-thoughts about the economy problems:
Well, everyone with littlebit math should understand that lending money from each other won’t make everybody rich or even survive! It’s sad to watch people living their life thinking nothing but money and more money. Why you even need that money because all you do is work work work and never have change to enjoy your life? Don’t be sure you have your retirement days to enjoy it. Not all do.
A simple man hint to fix the economy of a used-to-be most powerful country of the world:
Get out of that dept anyway possible and drive that old junky car as long as you can afford better used one with your own money. Downsize your home for something that fits your family size and budget, not your entire family tree. Don’t listen government when they tell you to spent more money. Make your own Christmas gifts, don’t buy them, because all that noise making Chinese plastic junk annoys people anyway.
As a return you’ll get what I’m enjoying:
No creditors, no pressure, no worries about economy, no more next year model cars, no money problems, every morning is a good morning just like today even if my bank went bankrupt.
Happy life.
7. Greg J | 09.27.08
One of the common features of today’s American consumer is that they haven’t got a clue as to how our financial system works. You see, if everybody is getting rich off investments, stocks and flipping houses, it just doesn’t matter that the basic underlying principles of the economy are corrupt. Until now. But every party must come to an end. At some point, this game of “musical chairs” gets very upsetting to all those who find they no longer have a seat and they are out of the game. That’s the way it is with lenders who have a portfolio full of sub-prime loans that no one wants to buy at any price. They never counted on the entire market failing. They never expected that they would have to take some responsibility for the individual loans that were all thrown together into a package and called a “security” that was sold on Wall Street. But now, here we are, with the biggest bank failure in history and Americans are angry that there is a call to rescue the financial system with government (as in taxpayer’s ) money.
What everyone is forgetting is that YOU were at the party too. And YOU benefited from the new cars with rebates, the no-doc loans (either when you bought a home or a buyer bought your home with one of these loans) and the explosion of easy credit. If you didn’t think it was such a good idea, why wasn’t anyone protesting when President Bush told everyone to go out and spend money to keep the economy going strong. See, everyone tossed out the fundamentals of living within their means and just traded it for “getting everything now”. The only surprise is that we now must pay for this over-spending all at one time.
Some people are so clueless about the way the financial system works that they are getting caught up in the rhetoric of their Congressional Representatives. There is a little information coming out of Washington, but not much. The economic facts are that the U.S. Dollar may continue to decline as the credit worthiness of the country declines. And the economy could “shrink” if people all stop buying things and panic. So now is a time to live within your means but not to panic. It’s a time to understand something about banking, credit and values. But it’s not a time to pull your money out of the bank (unless it’s more than $100,000 in a single bank) or to behave in any other irrational way. We are going to weather this storm. It may even be possible for Americans to stop being so fiercly partisan and idealogical about their thinking–to think about what will benefit our entire country and not yourself. We’re really all in this together, like it or not.
8. Joshua Wise | 09.28.08
“To prove the U.S. banking system is healthy and works, were going to pay off all their debt.” -You the taxpayer.
Way to go you. Foot the bill of the scammers who ran out of people to scam.
9. WSiaB | 09.28.08
Keep in mind that they didn’t declare bankruptcy. The FDIC saw they were looking for a buyer and ceized the bank and it’s assets and sold them to JP Morgan. Would WaMu have failed if they had not done so? We will never know now, but it definately has put pressure on Congress to approve the bailout plan.
In California we can truly appreciate what the US Congress is facing. We had a governor by the name of Gray Davis that was faced with rolling black outs and staggering electricity rates (2800% of the previous years rate). He made the rash decision to subsidize the states electric bill and bail out utilities when they started to declare bankruptcy. This took California from a budget surplus to a deficit that we continue to try to pay off to this very day. When the dust settled it finally came out that this situation had been created by Enron’s manipulation of the market. This Wall Street bail out is the same scam on an unfathomable scale.
10. Rikki | 09.28.08
Can anyone explain how the gramm-swaps (PHil Gramm swap bill - Dec 2000)that permitted unregulated trading of billions of credit insurance policies (apparently bogus and not backed by assets) plays into this?
11. Peter Mackrael | 09.28.08
Recent bail-outs have already cost the US taxpayers about $700bn. I believe this bill - if approved by Congress - will do little more than transfer a second $700bn to Republican Party friends in the Wall Street community. It will increase US debt to about $12 trillion while doing nothing to prevent further consolidation and restructuring by US banks. In fact it rewards irresponsible behavior. This bill may reassure foreign lenders for a short while until they see that US debt continues to increase while GDP declines. It may delay but will certainly not prevent a recession in the US. However, this bill will severely limit spending on social programs for many years to come! Tell your federal representatives to vote against this bill.
Purchasing paper that the market says is worthless is no solution at all. If these banks need additional capital, let them sell assets and raise this capital themselves. If no private investors are interested then allow these banks to fail. In the event that remaining banks (including the many regional banks) are unable to provide operating capital and consumer loans, then and only then should the federal government buy or establish a bank for this purpose. Meanwhile re-establish and enforce investment banking regulations.
12. astonished | 09.28.08
So the fed stole assets from WaMu and sold 40 billion worth of good and bad assets to JP morgan for 1.9 billion, and if any of those assets actually do turn out to be bad then JP Morgan just sells them to the taxpayers??
first of all, why wipe out WaMu if your going to fix their bad assets anyways?
and second of all why am I going to buy garbage assets from JP Morgan for billions of dollars that they themselves never had to pay for? I mean they paid 1.9B for 40B in assets, and now I’m buying only the bad assets off of them for 31B which is 1600% more then they are paying for both good and bad?? Why is our government passing billions of dollars of profit to JP Morgan and not back to the taxpayers??
Anyone who thinks this deal is to help the bottom 99.5% of the american food chain better wake up.
14. Albert D | 09.28.08
I didn’t go to any party!! I’ve struggled all my life from my service during Vietnam to the present. Life never gave me anything I didn’t earn. Seems there were some who benefited by all the excess, but certainly not all were involved as many of those who wrote in said. Well, I am not complaining because all in all, my life has been good anyhow. Doing with what you have is very character building. Very little scares me as a result. This fiasco shows why it is written that “the meek will inherit the earth”. As these so-called bubbles ramp up and and burst only to leave devastation in their wake, those who are down to earth won’t have to worry about falling when the crashes hit. I’ve wondered for years how long things could go on as usual without a collapse. From the rude way business’ treat their customers with little or no customer service to government becoming increasingly more confrontational with time, to the polarization within our society where one group is pitted against another, it has made me wonder when the bottom was going to fall out. The old expression, “if we don’t hang together we shall surely hang separately” means more each day. How long will YOU continue to hold on to your high and mighty attitude? With all the various sins running rampant within our society we now see the reasons we shouldn’t tempt our Creator. Our government isn’t the answer. They are bankrupt, both morally and financially. If we turn back to The Lord, He will heal our nation. If we fail to heed our nation will cease to exist. Our enemies will overtake us instead.
15. Doug | 09.29.08
Rikki, I think you are confusing your swaps. The Gramm bill you refer to left a loophole for commodities futures speculators to avoid position limits through the use of swaps. But these aren’t the “Credit Default Swaps” that are the powerkeg underlying this crisis. The CDSs have been unregulated since they came into fashion several decades ago. They really mushroomed in the past 5 years though, reaching over 60 trillion dollars this year. That’s more than the entire world GDP, all of it a complex web of cross-bets on the health of other companies, mortgage bonds, etc. This market has been able to get this big because many of the swaps partially cancel out - in theory. However, the failure of a large player in this market would blow a gigantic hole in it, because it would leave other players with an empty spot on one side of a pair of trades that in theory hedged their position to neutral. That might cause some other players to then fail, triggering a cascade failure of much of the banking system, many hedge funds, etc. The ensuing chaos is hard to imagine. Also, although the overall net positions in the market may not be anywhere near 60 trillion dollars, the bankrupty proceedings could drag on for years, with most of the underlying assets ultimately consumed by legal expenses. The gigantic overhang of swaps is like a room full of dynamite - by comparison, the mortgage crisis is like a lot of small-to-medium-sized fires burning in different parts of the room, threatening to set off the whole thing.
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1. ELIZABETH | 09.26.08
R.I.P US Economy