Two-Year Anniversary of WaMu's Closure - A Look Back from a Depositor's Point of View
Today is the 2-year anniversary of Washington Mutual's closure. It remains the largest bank failure in the nation's history. At the time of the closure, WaMu was the sixth largest bank in the U.S. with $307 billion in assets and $188 billion in deposits. As a comparison, the second largest bank failure in U.S. history is Continental Illinois National Bank and Trust which had $40 billion in assets when it was closed in 1984. IndyMac which was closed a few months before WaMu had $32 billion in assets, just around 10% of the WaMu's assets.
Deposit Deals Didn't Stop a Run on the Bank
The closure came only 10 days after Lehman Brothers filed for bankruptcy. The financial crisis became serious after the collapsed of Lehman Brothers, and people were moving their savings away from anything that had any risk. That included WaMu, and it was the main reason why the bank was seized on the 25th. According to the OTS:
An outflow of deposits began on September 15, 2008, totaling $16.7 billion. With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business.
WaMu made a strong effort to keep deposits. For a month before the closure, WaMu was offering 5% 1-year CDs. That far exceeded the 1-year CD rates offered by other banks. For example, in my August 23, 2008 weekly summary, the top three 1-year CD yields were 5.00% at WaMu, 4.50% at Air Force FCU and 4.40% at BankUnited.
I and many of this blog's readers took advantage of this CD deal. Everyone here knew to keep under the FDIC limits. However, there were many who didn't trust the FDIC. A reader left the following comment in one of my WaMu blog posts, "FDIC does not have enough insurance coverage in the event of huge bank collapses. Therefore I would not put money into WaMU."
If the FDIC had not been able to find a buyer, it would have been costly to the FDIC's deposit insurance fund. That didn't happen. The FDIC was able to get JPMorgan Chase to take over WaMu. According to the New York Times, Chase absorbed "at least $31 billion in losses", and this would have fallen to the FDIC if there had been no buyer.
How WaMu's Closure Affected Depositors
The closure had no immediate effect on depositors. All deposits even those above the FDIC limit were transferred to Chase. As the FDIC stated, "No one lost any money that was deposited in Washington Mutual Bank." In addition, all existing WaMu CDs were honored by Chase to maturity. So everyone who had opened those 5% CDs did in fact receive a good deal.
The time soon after the closure was also interesting for savers. Those hot 5% 1-year CDs didn't immediately end. It wasn't until October 7th that WaMu stopped offering these 5% 1-year CDs. After the 25th, all WaMu deposits were deposits of Chase so it was one of the rare opportunities in which savers were able to take advantage of a very competitive CD at a financially strong institution.
In the short-term, the closure of WaMu had no effects on depositors. However, as the months went by, many of those past deposit deals at WaMu went away. WaMu started its free checking and high-yield online savings account in 2006. Both remained good deals through 2008. It didn't last. As I reported last April, this savings account (which was converted into Chase Plus Savings Account) was paying only 0.10% for a balance of $10K. I just checked the rates today, and the non-relational rate is still 0.10% for a $10K deposit. The special 13-month CD rate is now only 0.70%. The standard 12-month CD rate is only 0.25%. This is the same rate that was available when many of those special 5% CDs matured in 2009. As I mentioned last year, those who let their CDs automatically roll over had their funds moved into this 0.25% 12-month CD. Hopefully, everyone was able to avoid that.
Two Years After WaMu's Closure
We may have lost some of those WaMu deposit deals, but that's a small loss compared to what may have happened if the FDIC had not been able to get Chase or another mega-bank to take over WaMu. I still think depositors who stayed under the FDIC limit would have been fine, but it would have created more fear at the height of the financial crisis. The government did take other steps that prevented the financial crisis from turning into a depression, many of which were controversial. Nevertheless, many of these steps were helpful for depositors. One notable step was the temporary increase of the standard deposit insurance limit from $100,000 to $250,000 (which is now permanent). That took effect on October 3, 2008 with the signing into law of the Emergency Economic Stabilization Act of 2008. Our government may have prevented a depression, but it didn't prevent a bad recession. Savers continue to suffer as the Fed keeps rates at record low levels in an attempt to stimulate the economy.
Yesterday, Chase sent me a coupon good for $150.00 if I bring it into the branch and agree to initiate direct deposit into the account within 60 days.
The closing of the Purchase and Assumption Agreement has still not occurred, the FDIC is waiting on a final bill from the Bankruptcy court. Oh yes there will be a big one. First the FDIC did not have the authority to close the Bank, that belonged to the Office of Thrift Supervision. In order to close and take the bank into receivership a solvency analysis needed to be done to determine if the banks were solvent; because this was never done, no cease and desist order or Re-Capitalization Letter was ever issued.
For months JPM had been working with the FDIC on how to conduct the Auction. For Months JPM had been getting inside information from WMB under Sham Negotiations to buy the bank. You keep hearing that JPM offered $8.00 a share for WMB that too is wrong, it was more like $4.00 a share and it would have been a stock transfer. True JPM left open the possibility that it could go as high as $8.00 a share, depending on the Loan Portfolio’s performance but after the deal has been done who is going to pay more.
It was right after WMI brought on Steve Rotella from JPM that the troubles began; though Rotella was apparently let go right after the seizure it was the people that he brought over from JPM that caused the problems, specifically the risk assessments and others in charge of lending. Oddly enough those that were brought in and did the most damage to the WMI lending portfolio were kept on by JPM and doing well.
To get to the heart of the matter, if the FDIC did not have the funds to cover WMI shouldn’t have gone down it would never have been able to cover to 70-90 trillion dollars JPM had out in Derivatives. AIG went down because of this and JPM was next on the list. JPM knew it The FDIC knew it and together they worked to get JPM the bank it wanted and needed to stay alive.
WMI had the Capital it needed to survive, JPM did not. Project Philmore was to downstream 20 billion dollars from WMBfsb to WMB, all of the required documents were in so the FDIC and the OTS were well aware of the ability of WMI to re-capitalize.
What is the outcome of all of this? Most likely JPM will retain WMB as well as WMBfsb and everything else stolen. The Bankruptcy court in Delaware will set a fair value and damages and the FDIC will be handed a tremendous bill, most likely above 200 billion dollars. Then the FDIC will hand JPM Chase a bill for the remaining balance and the deal will be closed. The Share holders of WMI will be made whole.
http://www.bizjournals.com/seattle/stories/2009/12/28/story1.html?b=1261976400^2637281&page=1 http://seattle.bizjournals.com/seattle/stories/2009/12/07/story1.html http://seattle.bizjournals.com/seattle/stories/2009/09/28/story1.html
Read more: http://www.thenewstribune.com/2010/07/21/1271201/examiner-to-get-wamu-case.html#ixzz10ed7CNX3
Joshua Hochberg, who was appointed examiner in July, said he needed to extend the deadline for his final report to Nov. 1 from Oct. 8 as he required "a significant number of additional documents" from JPMorgan Chase & Co (JPM.N), government agencies and others.
Hochberg was appointed to determine Washington Mutual's assets, including potential legal claims it might have if, for example, JPMorgan or the government were found at fault for causing the bank to fail.
Shareholders have said the total assets could be worth $30 billion, far more than the company's estimate of less than $10 billion.
Judge Mary Walrath of the U.S. Bankruptcy Court in Wilmington approved the extension of the examiner's deadline at a court hearing on Tuesday.
""Most notably, the largest bank to fail, WaMu, was well-capitalized according to the applicable capital adequacy standards at the time of failure." (page 111 onwards)
If you consider your self a journalist, please do some DD before writing an article.
WMB was stolen by the FDIC and gifted to JPM. At the time of seizure WMB Tier 1 Capital Ratio was well over the required 8 %, and much over of the 4 % required by the FDIC, WMB fsb Tier 1 Capital ratio ( a sub of WMB) was aboce 160% with around 20 bill. cash!!!!!!!. At that time JPMC Tier 1 Capital ratio was below 6 %.
Which Bank was under capitalized??? You can make an educated guess.
JPM was in real danger during the financial crisis, they needed to bailout JPMC very badly. JPMC had trillions of dollars in derivative positions that could put the entire economy in danger, that's why they gifted WMB (a solvent bank) together with WMB fsb to JPMC.
Please educate yourself before you write an article.
Anonymous #11, which commenter were you addressing? The WaMu Examiner? Seems like it, but I wanted to be sure.