None that have been following the WMI case in the U.S. Delaware Bankruptcy court would say that the FDIC’s receivership and fire-sale of WaMu has gone smoothly. But why has it become such a mess? The answer might be as easy as simple as 'the Purchase and Assumption' agreement used by the FDIC…and a lack of understanding by Sheila Bair on how a Bank Holding company operates (see last paragraph).
You see, the FDIC has a standard P&A document that it applies to banks it receives and sells and the P&A is fine for most small banks. The P&A has a section entitled “3.1a” where assets being sold would be listed, however this section is usually not applied as the FDIC uses the term “Whole Bank” to cover the transfer and sale of deposits and related assets. (You can do a search in google and find that the P&A has been used as a blanket document over and over by the FDIC). In addition, when assets that are part of the smaller banks are not directly related to the deposit base – they are sold at book value, in a sense, ‘liquidated’ to the purchaser of the deposits.
The reason the sale of WaMu assets to JP Morgan Chase is such a mess is that the assets sold are missing in the 3.1a. Some WMI shareholders say they saw the 3.1a when the P&A was first published but FOIA requests and recent public access the the P&A show no 3.1a instead saying that the missing 3.1a is a scrivener’s error.
At any rate and this is the crux of the problem, the blanket, 'simple', P&A should not have been used for a company as large and as complex as Washington Mutual Inc. The mere fact that it was used shows that the FDIC was rushed in its receivership or had no idea how WMI operated, the term Whole Bank has little relevance to WMI and it should’ve not been applied in the P&A as a substitue for 3.1a – or – that is to say, in this case the 3.1a section should’ve been filled out in its entirety.
This is why the Providian Credit Card division of WMI was transferred to JPMc. Certainly no one would say a credit card business is part of the deposit base of a bank but it was transferred to JPMc as part of the P&A under the statement “Whole Bank”. Or at least JPMc thinks it was – we know that JPMc claims that the division was transferred but there is no direct reference in the P&A to Providian.
We also know that bank accounts of WMI were placed in control of JPMc and are considered a deposit but are now being construed as an investment by WMI, according to court filings by JPMc. But possibly even worse is that WMI in fact had two banks; WMB and WMfsb and both banks were considered ‘failed” and transferred under a single contract that again listed no assets, listed no values.
So the real reason this is such a mess is this; Sheila Bair has/had no idea of the complexities of a Bank Holding company.
She certainly understands the complexities now as shown in her recent comments to the Economic Club of New York, “The FDIC's resolution powers are extremely effective when a smaller bank fails. But they fall short when it comes to very large financial organizations. Why? The main problem is that we don't have the ability to resolve bank holding companies. We can only resolve the insured depository institution within the holding company.” In fact, she is so aware of the mess the receivership and fire-sale WaMu has caused that she’s openly requesting additional authority from the Obama administration. At this point we are all waiting on the sidelines to see how this plays out.