How WaMu failed

By Felix Salmon
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.

2 comments

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Calculated Risk blog linked to an article from Cleveland about how the parent company of a bank took its deposits out before the FDIC could swoop in. This part was great:”If the bank is seized and the deposits are in the bank, it puts the parent company in a position of having to fight with regulators to get its [own] deposits back,” Davis said. Customers and regulators might be angered by the strategy, Davis added, but said: “There’s nothing illegal about. It’s business. It’s moving to protect assets.”http://www.cleveland.com/busines s/index.ssf/2009/12/amtrusts_bankruptcy_ filing_may.htmlAnd people should feel guilty about walking away from a mortgage? No, “It’s business.”CR link: http://www.calculatedriskblog.com/2009/1 2/amtrust-lawyers-discuss-bank-seizure.h tml

Posted by Neil D | Report as abusive

The underlying cause may very well be that the entire real estate loan portfolio of QaMU (as well as Wachovia and Downey) is comprosed of Option ARM’s… in a normal market a decent loan produvt… however, due to the REFUSAL of the lenders, Fed, Treasury and Congress to really understand and deal with the cause of this crisis (1-4 unit residentail real estate)the free fall in real estate values make these loan virtually impossible to refinance… a huge proportion of the loans were made to self-employed borrowers… who due to underwriting guidelines, are now virtually excluded from obtaining any form of financing…

The fact that there is no real loan modification program in place the several million Option ARM’s will in place wil now guaranty a new wave of foreclosures… 3-5 year more of this to follow!!!

At present the modification procedure takes upwards of 9 months to cokplete; and demands that the homeowner first become delinquesnt; thereby making a mess of their credit… try buying that new GM car with a 520 credit score!! The programs now in place, HAMP included, are akin to going to the hospital with a heart attack, and being treated for an ingrown toenail!! Curently, there are upwards of 7 million problem loans… and Mr. Geithner is boasting about aiding some 400,000 homeowners
Onlt government can fail and call it a win!

Posted by GotDOCG | Report as abusive