Interesting piece on the new Portfolio.com site — now under new ownership — on the question Why Did They Close WaMu?.

The question they ask is “Did regulators pull the trigger too soon.” I believe the answer was obvious — they had massive Sub-prime exposure, and were likely to have splattered quite spectacularly.

Regardless, it is the process of shutting down a huge bank that comes under scrutiny.  Excerpt:

“Yet more than a year later the details of the decision remain shrouded from view. WaMu’s main regulators—the Federal Deposit Insurance Corp. and the Office of Thrift Supervision—continue to decline requests to discuss their actions, release liquidity figures, or give any other evidence that the bank was in a precarious situation that demanded immediate action. In refusing the disclosures, the regulators cite confidentiality regulations for a bank that no longer exists except in a liquidation proceeding and as a basis for numerous lawsuits.

Similar secrecy surrounds other bank failures. As the toll of closed banks mounts—more than 140 have been shut by regulators since the housing bubble burst in early 2008—and as Congress prepares to overhaul the regulatory structure, more people are asking what exactly was wrong with these banks, and whether regulators always acted appropriately in closing them.”

I am unconvinced of their conclusions, but it is worth a quick look.

(NOTE: The site is sometime glitchy — if you get “Not Found“, hit refresh a few times).

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Previously:
The Rise & Fall of WaMu (February 2nd, 2009)

http://www.ritholtz.com/blog/2009/02/the-rise-fall-of-wamu/

The Last Days of WAMU (October 1st, 2009)

http://www.ritholtz.com/blog/2009/10/the-last-days-of-wamu/

Source:
Why Did They Close WaMu?
Kirsten Grind
Portfolio.com, Dec 07 2009

http://www.portfolio.com/industry-news/banking-finance/2009/12/07/why-federal-regulators-closed-washington-mutual/

Category: Bailouts, Credit, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Why WaMu Was Closed”

  1. KentWillard says:

    Both WaMu and Wachovia had huge Option ARM exposure. Since these were held as whole loans rather than securities, they did not have to be marked to market, and loss reserves were probably scarce as long as the loan was current. But Option ARMS were failing quickly. The balance sheet and capital would be much weaker than stated.

    Wall St. saw this and was shorting the stock and selling the bonds. Large, uninsured, mostly business depositors saw this and started to withdraw their large deposits. This is different from the classic run where many small bank customers stand in the street to withdraw their household savings. Once a run on deposits starts a regulator has to intervene because liquidity starts disappearing at an hourly rate. And quickly the bank would have lent money that it no longer had.

  2. ZackAttack says:

    There were a lot of warning signs that WaMu was in trouble. I recall reading several pieces singling them out as early as 2005. The miracle is that they held out as long as they did.

    Any ideas how badly TPG took it up the chute on this one?

    FDIC isn’t telling us a lot of things. Just try to get hold of the results of a property auction. It tells me that it’s a public goal to prop up real estate prices.

  3. markwax says:

    WaMu was closed precisely to prevent stockholders from escaping from what they knew ( insiders) or should have known (investors) was a house of cards. Bailouts only came later for banks.

    Jsut last week, Am Trust( holding co) saw a CH XI proceeding in anticipation of FDIC seizure of the bank, which occured last Friday. The controlling family removed $7 million of it’s own capital. The FDIC consummated the deal which saw NY Community Bank take over. There was a $2 billion shortfall that the FDIC picked up.

    Banskstas are still sticking others for the bill, after they knew that the risks were unwarranted.

    Requiring people to put up more of their own money is the only way to fix this in the future.

    Publicly traded banks should be chartered with a “claw back rule” in place.

  4. Kent,

    those are some good points, though, w/this: “And quickly the bank would have lent money that it no longer had.”

    When do banks lend ‘money on hand’?

    We live in a ‘Fractional-Reserve’ world, no?

    the ‘borrower’ comes in, signs a Promissory Note, the Note ‘funds’ the ‘Loan’, yes?

    btw, why is the ‘borrower’ paying Interest? where are ‘funds’ being ‘lent’–in this banking model?

  5. MarkGillCPA says:

    I have no problem with WaMu being taken out. What I question is why did the government turn around and hand these assets to other “too big to fail” banks. Why did the FDIC roll WaMu bank into JPMorgan or Wachovia into Wells Fargo. Why didn’t the FDIC take the time to break these banks up into smaller pieces that could have been sold off to smaller, better run banks?

  6. Low Budget Dave says:

    One your loan portfolio is so bad that federal regulators are sniffing around, you lose a seat at the table. WaMu knows perfectly well why they were closed. They just want the details so they can point to all the other banks that were worse. Tough cookies.

    Just because everybody else is getting away with it doesn’t mean you can steal.

  7. bsneath says:

    Never under estimate the power of proximity. Would WaMu or PNC have closed if they were headquartered in NYC?

  8. lalaland says:

    seattle times had great coverage and remember more details from somewhere about the bank runs…

    “WaMu’s shaky condition spooked depositors, who began withdrawing large sums in July and August 2008. The run eased in late August but reignited the next month, after Killinger was fired and rumors were rife that WaMu would be sold or shut down.

    More than $17 billion flew out the door between Sept. 5 and 25, when federal regulators finally pulled the plug on Killinger’s dream of a banking Wal-Mart.”

    http://seattletimes.nwsource.com/html/businesstechnology/2010131911_wamu25.html

  9. Onlooker from Troy says:

    I certainly haven’t delved into the details of this, but any notion that WAMU wasn’t a time bomb waiting to go off, and had already failed spectacularly, is just some kind of revisionist history or sour grapes. As Denninger has written about repeatedly, the FDIC is waiting too long to take over these banks, allowing them to get into an awful state that brings huge losses when finally done.

    I’m sure that there has been a whole spectrum of ways that bank failures have been dealt with as the fed govt has stumbled through this, always a few steps behind the curve. This is just a bunch of lawyers and disgruntled rich folks hoping to scrape back a few morsels from the carcass at the taxpayers’ ultimate expense, no doubt.

  10. ToNYC says:

    In short, Jamie Dimon wanted a bank/footprint on Left Coast and Brother Timmy knew where Mr. Chase could get one on the cheap…”Let no crisis go to waste”, advised Uncle Miltie Friedman and the Chicago boys.
    “Le secret des grandes fortunes sans cause apparente est un crime oubli , parce qu’ il a ete proprement fait.”
    —-from Le Père Goriot (1835), Part II —Honoré de Balzac