Did the FDIC Sabotage WaMu's Management and Erode Investor Confidence? 72 comments
Michael Steinberg
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FDIC Chairwoman Sheila C. Bair, together with JPMorgan Chase (JPM) CEO Jamie Dimon shared the spotlight for saving Washington Mutual (WM) depositors without costing the government a dime. The story is old by now; JPM got the good and the bad of the bank without the holding company’s ugly debt. (Think Clint Eastwood.)
After the glory fades, the reality will come out that the FDIC cannot be trusted. JPM and others were conducting real negotiations with the FDIC at the same time they were conducting fake negotiations with WaMu’s management. During the consummation conference call, Jamie Dimon disclosed that JPM had unprecedented access to WaMu’s mortgage detail. JPM received computer tapes with the most granular mortgage detail (FICO scores, LTVs, and MSAs) to compare with their own data and develop loss projections. JPM had the time to do a true bottom up analysis.
I do not know if it is common FDIC practice to negotiate the sale of a to be closed bank without informing management. But in this case, it sabotaged WaMu’s effort to sell its valuable branch system. I also do not know when the FDIC undercut WaMu’s management. Was it before or after the fall of Lehman? WaMu started to face a bank run on September 15 – the day Lehman filed for Chapter 11.
The FDIC alone could be proud of its accomplishment, but in the overall context they further eroded investor confidence. Now the moral hazard has spread beyond equity holders to bond holders. While WaMu had been slowly losing deposits, the fall of Lehman and subsequent nonstop media coverage accelerated withdraws. The $16.7B (9%) deposit loss since September 15 alarmed regulators.
We are on the cusp “investing” $700B in government money to liquefy toxic bank assets and rebuild investor confidence. We got here through a series of miscalculated idealistic policies based on moral hazard. At this juncture moral hazard has proved extremely expensive with little investor confidence to show for it. Surely backstopping a Barclays (BCS) purchase of all of Lehman and a JPM purchase of all of WaMu would have bought a great deal of investor confidence at a cost far less than $700B.
Where does this leave Wachovia (WB)? The stock market and the media would have us believe that the vultures (the mode of JPM) will wait for the FDIC to serve them the carcass. There are many reasons why it is not in the best interest of the government to let that happen. Beyond the shock to investor confidence, the United States should not be limited to a handful of mega banks. JPM, Bank of America (BAC) and Citigroup (C) need competition.
The Paulson/Bernanke team has not been very pragmatic in creating value in the form of investor confidence for their bailout money. Punishing or killing shareholders and now bond holders have proved very expensive to the government. With each new implementation of moral hazard, the government has to lay out more money to lift investor confidence. The latest trade off – forgoing possibly $60B in Lehman and WaMu backstops created the need for Paulson’s $700B market maker fund.
If the government lets another large financial or insurance institution fail, or severely punishes their shareholders, Paulson's $700B slush fund would be the same as you know what in the wind. Proactively, the most cost effective thing the government can do to prevent bank runs is to raise the FDIC insurance limit from $100K to at least $1M for individuals and $5M for businesses.
Disclosure: Author is long BAC, C, JPM and WB.
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On 09/17/08, 'U.S. regulators' publicized the need to sell WaMu despite WaMu's executive team claimed their reserve balances were adequate. At this moment, the run on the bank occurred. Either WaMu's executive team mislead shareholders, customers and its own employees about their reserve balance or these 'U.S. regulators' panicked and created an environment that eroded WaMu's deposits.
Do shareholders and employees harmed from this event have the right to file for damages against these 'U.S. regulators'? I hope a thorough investigation is done by an unbiased institution to chronically identify what really caused the largest bank failure. It's in the county's best interest.
What about the $700B bailout, does it protect innocent employees damaged from this event? Rather, it seems to reward and protect home buyers unqualified to buy a home. There seems to be some kind of social injustice if this is the case.
The news media and the govt kept saying how they saved wamu. When in fact it was a bank robbery the kind they put hooded crooks in jail for.
Some palms and pockets were greased on that deal.
jpmorganchase will most likely make billions on the deal.
But the main street small investors the govt has been saying they wanted to protect just got screwed .
The issue of Citi, JPMorgan and US Bank getting too big is real. But right now it is a good thing that these scavengers are around to help clean up the dead animals rather than let them fester and spread disease.
If we end up with an oligopoly in the banking system Congress and the states will have to get busy with some regulations to reduce the danger of that sort of financial structure.
I understand the FDIC reasons but don't you think they could have held out until the bailout? One more day? Don't you think stockholders should have been protected? The CEO was telling the world WM would survive, the FDIC pulled the plug unnecessarily. Never before has a bank of this magnitude been taken out under such terms. Te bank would have survived. The stockholders were raped by hte government.
The events in the financial markets in the past few weeks have however motivated me to stray from my prime area of interest.
Specifically, I was appalled at the seizure of Washington Mutual (WaMu) by the FDIC acting at the behest of the Office of Thrift Supervision (OTS).
I want to say upfront, that I had stock in WaMu, so I do have an axe to grind as I incurred losses after the seizure as the bank’s common stock plunged to 16c after the news. Washington Mutual has since filed for bankruptcy protection.
My interest goes much farther however than the loss of invested funds. My concern revolves around the events leading up to the seizure. Events which were orchestrated in the media, in the trading of the stock on the NYSE, statements by analysts covering the stock, statements by the bank’s management, the oblivious regulatory response by the SEC, demeaning and derogatory comments by the likes of CNBC’s Jim Cramer and the “head in the sand” approach by the touted David Faber, also of CNBC.
I want to try and stay on track with this piece and not wax philosophical, or at least hold those musings to a minimum. Also, I wish to hold the length of this article to a reasonable length while still conveying the salient points as I see them. I will also be asking all concerned citizens, (not just shareholders) to become proactive in voicing their concerns on this matter.
The prime concern
The overriding issue in this rather sorry tale boils down to some very simple questions.
1. Was OTS justified in requesting FDIC seize WaMu?
2. Did FDIC act properly in its seizure of WaMu?
3. Who (if anyone) had advance notice of the FDIC auction of WaMu and exactly when were they notified?
4. Why was this “auction” conducted on a Thursday night, when the “normal” procedure in closures almost universally occurs on a Friday to enable FDIC time to review the books of the seized entity over a weekend?
5. Why was this seizure initiated immediately AFTER media reports of a possible “bailout” deal by the Congress?
6. Who at FDIC determined that the sum of 1.99 billion dollars paid by JP Morgan-Chase was an adequate figure to acquire the assets of WaMu, whose deposit base alone at the time stood at approximate 129 billion dollars?
7. What motivated OTS to determine that the withdrawal of deposited funds (mainly by those with more than $100,000 in their accounts) constituted a true “run on the banks deposits” and not possibly an orchestrated event?
8. What decision making process was employed in considering the possible cascade effect of the premature seizure upon other pending bank acquisitions?
A myriad of other questions
There are of course a myriad of other questions which hang over this deal by FDIC. For the sake of brevity I will omit them at this writing as the above eight should spur the needed concern
Our Politicians are so wrapped up in the election that they are willing to give away the country even if the people do not want the 700M investment or what some say is a bail out. And at a time when all this could have been avoided if the government would have gone away from the market to market accounting rule they recently put in place, along with the removal of the uptick rule in August of 2007 and changing the rule to let banks go to a 30:1 or 40:1 ratio on lending, not to mention their quest to put everyone in a house even if they couldn't afford it. Yes we can thank our government for our problems today. These things are just not Bush, they are heavily the Congress. The Markets can work if government would put the rules back in place that were there before they changed them..., you know the rules that were put in just after the 1929 Depression and only recently changed, and thus the real cause of what is happening today. My only recommendations are not to vote for any of these people up for re-election and vote for a third party in the Presidential election, that is if you really want change. Our Country is heading in the wrong direction and unfortunately neither of the Presidential Canidates has an answer, nor will change anything. You see..., Both Dems and Reps have joinded into one party and that my friends is the only change you will see from them, no matter what they tell you.
Moral hazard happens when the government does not allow investors/risk takers to see their investments fail. With WaMu and Lehman they did. That is what the investor bargained for.
To the contrary, with Fannie/Freddie, the gov't wrongly protected the bondholders who had no explicit govt guaranty. This creates moral hazard.
Who trained or taught these people that the govt should protect investors in America? Where does this nonsense, this expectation come from?Can someone answer this?
WaMu bondholders were shafted. They will get zero for their once-legal primary claim to company assets as collateral for the money they loaned the business. If the FDIC had waited until a bailout bondholders would be fully protected. Hard-earned money, invested and lost for political expediency. (Unlike AIG bondholders who will be fully repaid. Go figure.)
We are witnessing the essence of government laid bare. Property rights ignored and trashed for purposes the government thinks best. I have read that regulators are now saying that AIG shareholders won't even be allowed to vote on the takeover by the FED. It's a fait accompli, whether they like it or not.
Welcome to the new world of investing. If you put your money in the shares or bonds of a company and you read about it in the headlines, you better think hard about selling out before the government decides you don't deserve to get anything back.
I'm sure that will help boost the dwindling TRUST in the market.
If you don't already have a couple month's worth of living expenses squirreled away in cash you might want to think about doing so before your bank is 'assimilated' for government purposes. Who knows, you may be forced to stand in a very long line at an ATM every day just to get by.
Caveat Emptor
We do not invest on the premise that the FDIC would do what it did - pillage and rape the investors
This is the largest open effort to move America toward Socalists Democracy in the history of the planet. So few reall see the true picture. It shows in their writings. It is telling in their statements.
There is so much at stake here for the sole of "LIBERTY" . It could very well be said Liberty lost. Because that is just what has happened. A capitolists system will not work unless there is allowable failure. When the Banking system poured 100s of millions into changing Bankrupcy laws, this is what started the ball rolling in their direction. Looks as though they have won. American citizens defeated again. Send Liberty to the scrap yard.