Commentary

Decline and Fall: the Wamu Saga

The Fed’s took my bank- for a day, it turns out. According to Marketwatch,
the federal Office of Thrift Supervision shut Wamu down yesterday
and put the Federal Deposit Insurance Corporation (FDIC) in charge
of dealing with what was left of this once thriving thrift institution.
The FDIC wasted no time, auctioning off remaining deposits- including
my $2.62- to JPMorgan Chase.

I withdrew the lion’s share of my money two weeks ago- all but $2.62
(just in case they survived). Wamu has been on death’s door for several
months and I didn’t feel good having any more than a small cup of
coffee’s worth of cash in their vaults.

The Office of Thrift Supervision explained that Wamu had “insufficient
liquidity” to carry on in a responsible manner, further stating that the
thrift was in an “unsafe and unsound condition” to conduct its daily
business affairs.

Wamu, with $310 billion in assets, is the largest bank failure in American
history. The feds said Wamu had $900 billion in customer deposits, and
would be open again today. (JPMorgan Chase paid $1.9 billion for the
deposits, declining to touch the toxic mortgages or any other bombs
that were ticking on their ledgers.)

Nervous depositors such as myself were withdrawing money at a hectic
clip, siphoning close to $17 billion from its branches in the last two
weeks. Standard & Poor’s then added a final nail in Wamu’s coffin on
Wednesday when it downgrading their credit rating- leaving it dangling
in the wind, unable to find financing to keep it afloat.

Wamu’s demise was due in large part to its aggressive peddling of
“Option ARM” home loans, which allowed borrowers with lousy credit
histories to avoid paying the full amount of interest due each month.
This idiotic provision leads to what bankers call negative amortization-
meaning that loan balances grew over time, instead of shrinking as
they do with conventional mortgages. But, in the days of the real
estate bubble, rising prices would magically increase equity and bail
both the reckless bank and clueless borrowers out.

These loans also lured borrowers in with low “teaser” rates that would
adjust sharply upward after a two year introductory period. Everything
was fine as long as home prices kept rising. Borrowers simply planned
on refinancing, and cashing out more equity to spend on stuff that
would make them happy.

Then reality hit. real estate prices headed south, leaving dodgy borrowers
with loan balances worth more than their poorly built chateaus. These
loans started to rot on Wamu’s balance sheet as borrowers stopped
paying, eventually leading it into the hands of federal regulators.

Depositors at Wamu will be fine. They will now do their banking with
Chase, which will bring Wamu’s consumer banking, home lending and
credit card businesses under their umbrella.

According to Marketwatch, the banking crisis claimed twelve lenders this
year. Wamu is the latest and largest, but it went smoothly and without
the use of FDIC funds. The problem is that hundreds of other teetering
banks may eventually fail and the handful of large and healthy ones left
cannot possibly save them all.

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