How WaMu failed

December 3, 2009
Kirsten Grind's 4,000-word story on the failure of WaMu, which is well worth reading.

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Amidst the orgy of one-year-on reminiscing in September, I missed Kirsten Grind’s 4,000-word story on the failure of WaMu, which is well worth reading.

She gives a great impression, for instance, of what a bank runs look like, circa 2008:

A longtime customer in Orange County brought a cake to her branch that spelled out in frosting, “We love you WaMu,” and then closed her account. Another customer at a branch in Southern California withdrew all her money and then, feeling guilty, returned the next day with a freshly baked peach cobbler for the branch’s staff, according to a former WaMu manager. Her money, however, stayed away.

Each day, Brinks Security trucks pulled up to replenish WaMu ATMs across the country. Before the crisis, the trucks delivered about $30 million in cash a day nationwide, Freilinger said. During the September bank run, they delivered as much as $250 million a day.

The general impression from Grind’s article is that WaMu was certainly going bust: it had been downgraded to junk by Moody’s, and was about to appear on the FDIC’s problem-banks list, where its size would mean it had no anonymity. It was in the midst of a second bank run when it got taken over; further runs were all but certain.

The big question, though, is whether the FDIC gave a nod and a wink to potential acquirers that they would be able to buy WaMu in a distressed sale from the FDIC, rather than having to take on all its liabilities by buying it from shareholders.

Grind doesn’t go into the details of capital structure, though, and I wonder: absent FDIC intervention, is there any way for a bank’s bondholders to take control of the company, wiping out the shareholders? My guess is there probably isn’t, and that such an outcome won’t even be possible in the brave new world of living wills and ex ante resolution regimes. But I’m sure all those bondholders — who got all but wiped out themselves — wish that there had been.


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