The bailout was defeated in the house a few minutes ago. Short-term this is very bad news as confidence in the worldwide financial system is quickly reverting to zero. The Dow was off as much as 700 but has come back to down 500 as I write this.
I didn’t even get a chance to write a post about WaMu being the largest bank failure in history. Continental Illinois, which failed during the S&L crisis, had held the record for 14 years until last Friday, when the FDIC took out WaMu and forced a sale to JP Morgan. Continental had $30-$40 billion of assets when it failed. WaMu had $310 billion of assets as of June 30th. But WaMu only held the record for a single business day.
Average Americans may be forgiven for not understanding why Congress is moving so quickly to pass this massive bailout package. Sure the economy isn’t great—gas prices are still high, it’s harder to get a home loan, some folks have lost jobs—but why are guys close to Paulson saying things like this (from the Times of London):
Yesterday Warren Buffett said he’s investing $5 billion in Goldman Sachs. (11/6 update: the stock is now 33% the exercise price on Buffett’s warrants) The market is interpreting this as a show of confidence from the world’s savviest investor. But why now? Is Goldman (or any other hammered financial stock) really a great value on the company’s merits? Warren’s own commentary suggests not. This morning on CNBC he said very clearly that he made the investment in Goldman only after it became clear Paulson’s $700 billion bailout package would pass. Paulson is riding to everyone’s rescue and Buffett wants in on the ground floor.
Below is a reprint of the Op-Ed I published in today’s Baltimore Sun.
“Is the Worst Yet to Come?”
by Rolfe Winkler
September 21, 2008
Will it ever end? For more than a year, the financial system has struggled to function, stricken as it is with economic Ebola. Cash is the only cure, and banks have raised almost $400 billion. That’s not nearly enough, however, so the federal government has committed to various bailouts that will cost hundreds of billions over time. The most expensive yet – a new super-agency to buy bad debt – may eventually cost north of $1 trillion.
Today’s top headline on Drudge is this: Federal Bank Insurance Fund Dwindling.
The article itself reads like a repeat of the one I posted here two weeks ago. In a nutshell, the FDIC doesn’t have enough money to bail out depositors if WaMu and any other large banks fail. Luckily, Bernanke and Paulson are staying ahead of events as best they can. Right now, WSJ.com is reporting that Citigroup and Wells Fargo are in discussions to take over WaMu. The NYTimes is saying its JPM, Wells and HSBC. Any of the above would likely get a huge chunk of change from the Feds for taking on WaMu’s nasty balance sheet.
Washington Mutual Inc., the biggest U.S. savings and loan, had its credit rating cut to junk by Standard & Poor’s because of the deteriorating housing market….”Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade,” S&P wrote.
UPDATE 1:50 PM. CNBC NOW REPORTING BUFFETT IS NO LONGER IN TALKS WITH AIG.
Story at Bloomberg:
Billionaire investor Warren Buffett’s Berkshire Hathaway Inc. “is thought to be in talks” with American International Group Inc. about a possible investment, the Insurance Insider reported, citing unidentified sources.
CalculatedRisk is reporting that the Fed has expanded the types of collateral it is willing to except in exchange for loans. A year ago it only accepted the highest-quality (least risky) collateral in exchange for a loan. Treasury bonds, for instance. Now it will be accepting equities(!).
The news just keeps getting worse. AIG was said to be in trouble, but not facing the same sort of crisis as the investment banks. Sure it has exposure to toxic mortgage assets, but it also has real businesses it can sell to raise capital: an automobile insurance business, an annuities business and an aircraft-leasing unit.