Are some U.S. banks “too clubby to fail?”

April 13, 2010

Can a bank be “too clubby to fail?” Former Washington Mutual boss Kerry Killinger thinks so — and reckons WaMu’s outsider status explains why it wasn’t bailed out in September 2008. The circumstances of the West Coast lender’s demise do raise legitimate questions. But if anything, WaMu was more sacrificial lamb than outcast.

Killinger, who was ousted as chief three weeks before the bank went under, pointed out that WaMu was excluded from the Treasury’s initial July 2008 list of financial firms whose shares speculators could no longer short. The Federal Deposit Insurance Corp also made the highly unusual step of seizing the bank on a Thursday rather than a Friday. And if regulators had waited just a week longer, WaMu, he argues, would have benefited from a number of government programs that shored up the banking system.

There’s some truth to all of this. FDIC’s decision to expand deposit insurance from $100,000 to $250,000 per account may well have stopped WaMu’s bank run in its tracks. And the FDIC’s debt guarantee program and Treasury’s Troubled Asset Relief Program (TARP) would have shored up its balance sheet — assuming WaMu would’ve been deemed healthy enough. These measures allowed the likes of Citigroup to survive.

But if there is a conspiratorial air around WaMu, it’s all about timing. Then Treasury secretary Henry M. Paulson, after all, introduced his TARP idea four days before, and the first Congressional vote followed three days after, the seizure and sale of WaMu to JPMorgan. What better way to impress upon lawmakers how dire the situation had become than to have the recent failure of one of the nation’s top banks as Exhibit A?

WaMu may have been too far gone to help, as regulators apparently decided in mid-September, a joint Treasury/FDIC report due out later this week will argue. In any event, Wells Fargo’s experience punctures the club argument: WaMu’s West Coast rival was allowed to snap Wachovia out from the FDIC-approved clutches of Citigroup in a deal that consequently put it on a par with Wall Street’s giants. For Killinger — and other conspiracy theorists — that’s the exception to prove the rule.

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