Quick Thoughts on WaMu's Failure: Long Time Coming

Sep.26.08 | About: WMIH Corp. (WMIH)

Long time coming: while I'm sure the media (and others) will characterize WaMu (NYSE:WM) as a victim of the credit crunch, or perhaps Congress not moving fast enough to pass the bailout bill, the fact remains that WaMu's struggles started in '05/'06 when they began scaling back lending operations, closing branches, etc, due to problems within their mortgage business. Let's also not forget that WaMu started trying to expand its subprime credit card business last summer, despite ample evidence that it was time to pull back (if not exit) from that business.

I have some friends who used to work at WaMu as loan officers from '03 -- '06 and they're not exactly surprised right now, as they were first hand witnesses to the decline in the health of WaMu's lending business back in the '04 - '06 time period.

While it may seem that the WaMu failure just set upon us with dizzying speed the real truth is that it's just the result of malaise that has been lingering about for some time, it just took a while for the house of cards to collapse.

The Bailout: WaMu failing in the midst of contentious discussions on the bailout package will raise the very obvious question of: "would the bailout package have saved WaMu?" In my opinion it's highly unlikely that the bailout package (as constructed) would've saved WaMu, at best it would've prolonged the inevitable but I doubt it would've saved the company. At the end of the day WaMu was an undercapitalized and overleveraged institution that was losing money, while ridding itself of bad assets would've helped it wouldn't have solved the company's core problems.

Better yet the fact that no one stepped up to buy WaMu until the company had failed and could be purchased at a fire sale price, more or less answers the question as to whether or not the bailout fund could've saved the company. Because it's an indicator that the company's problems were so great that the simple shedding of bad assets (or another company taking them on via a buyout), would still leave you with a company that was so stricken with malaise that it wasn't worth buying at anything higher than a fire sale price.

Finally I've been a WaMu customer for some time and I'm a little sad (if not unnerved) to see a MY Bank let a lone a bank of that size collapse, and while I had already pulled out some of my funds I hadn't completely abandoned ship in the hopes that things would work out. At this juncture I'm more concerned for my friends that work there and the folks who always helped me with my business accounts, than I am for my money that's still on deposit as the combination of J.P. Morgan (NYSE:JPM) and the FDIC will keep that safe. I'm also concerned about the impact on the economy of the Seattle area as WaMu was a fairly large employer, and the pending job losses (employees, vendors, dependent businesses, et al) will definitely have a negative impact. 

Something I will do (however) is provide regular updates on what the experience is like for the customer of a failed bank that has been taken over/assumed by another institution, because while there are a lot of articles out there around "what happens when your bank fails", I haven't seen any written from a first hand perspective.

You can read more on the situation here [FT] , here [Reuters] , here [The Economist], here [WSJ] and here [The Seattle Times].

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.