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.