PROXIMO

Have Banks Turned or Burned? - Barron's

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On Mar 01 01:20 PM Kyle Krol wrote:

> www.wamu-shareholders-...
>
> www.youtube.com/watch?...
>
> On Thursday September 25th 2008, Washington Mutual Inc aka WaMu Inc.
> or WMI or WaMu, common shares trading under the symbol WM, opened
> at $2.62, rose to $2.69 within the first hour, and then fell on average
> for the rest of the day and closed at $1.69. In after hours trading
> it fell to $0.16. Take note it fell 90.5% just in after hours. During
> the regular day it fell 35.5%. For the entire day it fell 93.89%.
> All these percentages are based on the open, and excluding the pre-market
> trading data, which I do not have. For the day, the DJIA rose 196.89
> points, and closed at 11,022.06
>
> Clearly anyone who held WaMu through the day experienced a financial
> wipeout in their position. What caused this wipeout? In a statement
> issued on the night of September 25th the Office of Thrift Supervision
> (seekingalpha.com/symbo...), an office of the US Treasury,
> said “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.
> The OTS closed the institution and appointed the Federal Deposit
> Insurance Corporation (seekingalpha.com/symbo...) as receiver.
> The FDIC held the bidding process that resulted in the acquisition
> by JPMorgan Chase.” (link). WaMu had been seized and sold.
>
> Washington Mutual Inc was a bank holding company and owned two banks,
> the Washington Mutual Bank, Henderson, NV and a subsidiary of that
> bank, Washington Mutual Bank, FSB, Park City, UT. The first mentioned
> bank was the main banking operation, and the focus of everyone's
> attention. Both banks received the same treatment simultaneously
> on September 25th, 2008. For brevity they are usually referred to
> singularly as the Washington Mutual Bank aka WaMu Bank or WMB or
> WaMu. For the rest of the text this convention will be followed and
> they will be referred to as one enterprise and principally referring
> to the vastly larger Henderson NV incorporated bank.
>
> Just seventeen days earlier, on Monday September 8th, with the announcement
> of the placement of Alan Fishman as the new CEO for WaMu, WaMu simultaneously
> announced (link) that they and the OTS had negotiated a Memorandum
> of Understanding concerning aspects of the bank’s operations. It
> concluded with this sentence. "The business plan will not require
> the company to raise capital, increase liquidity or make changes
> to the products and services it provides to customers." Alan Fishman
> had recent successful experience with merging banks he was in charge
> of, and his employment and hefty salary were seen as an indication
> WaMu was setting itself up for a merger.
>
> WaMu experienced an acceleration of withdrawals, and hence draw downs
> in its liquidity, that the regulators at the OTS and FDIC felt justified
> a seizure of the bank. The accounts that withdrew were mostly large
> retail accounts of over $100,000, which at the time was the FDIC
> insurance maximum. These accounts were used primarily for payroll
> purposes. These accounts were mostly in California, where the memory
> of the IndyMac bank seizure was likely on their minds. The speed
> and amounts withdrawn do not qualify as a bank run, as a bank run
> is a complete wipeout of deposits over a few days. At most it could
> be characterized as a walk on the bank. The withdrawals were done
> by electronic banking over the internet and by wired funds. It was
> not in the news, people were not lined up outside the bank. WaMu
> was the largest thrift in the nation, and the sixth largest bank
> by deposits. They had 2,239 branches in 15 states, concentrated in
> the west and south. They were large enough that the Federal Reserve
> assigned them onsite full time bank inspectors to monitor, among
> other things, liquidity levels. The Federal Reserve was witness from
> beginning to end of the liquidity draw down.
>
> A walk on the bank, is a mild form of a run on the bank. Bank runs
> were typical of the great depression which started in 1929. Customers
> want their cash in their hand, because if a bank dies and locks its
> doors, their cash will be forever beyond their reach. Bank runs have
> an effect on the public and the government that tends to snowball
> and be a self fulfilling prophecy. If a new bank has a problem, because
> a bank run has happened recently, it may be happening again now,
> so they do a run on that bank etc. Bank runs close banks down, and
> draw their cash down to zero. A slew of bank runs that closes banks
> is known as a bank panic.
>
> In response to the bank panics of 1929 and the early 1930's, in 1933
> the government created the Federal Deposit Insurance Corporation
> (seekingalpha.com/symbo...). The FDIC is a government corporation
> that provides insurance on bank deposits. The primary reason for
> creating the FDIC was to prevent bank runs, from the demand side,
> depositors demanding cash all at once at the bank, which had been
> the typical bank run scenario in the depression of the early 1930's.
> The mechanisms to do this was insurance on the deposits so that even
> if a bank locks its doors, your deposits are covered up to the insurance
> maximum and you will be paid your money from the insurance fund.
> At the time of the WaMu seizure the insurance covered up to $100,000.
> In large part due to the WaMu catastrophe the FDIC has implemented
> a temporary increase in the amount of insurance on deposits, and
> it is now $250,000 until Dec 31, 2009, unless extended. The Chairman
> and four Board of Directors of the FDIC are all appointed by the
> President and confirmed by the Senate, with no more than three being
> from the same political party. The FDIC is self funded through its
> insurance premiums, which are paid by the banks. The FDIC has an
> immediate $30 billion line of credit with the US Treasury, and procedures
> are in place if more credit is needed. From 1996 - 2006 the FDIC
> waived the collection of the bank insurance premiums as it was at
> the upper limit of its legal reserves.
>
> The Federal Reserve system was created in 1913. The primary reason
> for creating the Federal Reserve was to prevent bank runs, from the
> supply side, the running out of cash at the bank, which had been
> a problem, causing bank runs, in the recession of 1907. The mechanisms
> to do this are by the banks loaning liquidity to each other in a
> process called Federal Funds, which is short for Federal Reserve
> Funds. Then there is a process of a bank borrowing straight from
> the Federal Reserve called the Discount Window. The Federal Reserve
> is a private corporation composed of the biggest banks in the country,
> who form the stockholders of the Federal Reserve. The Chairman and
> the six Board of Governors of the Federal Reserve are all appointed
> by the President and confirmed by the Senate. This is the legal extent
> of the Governments involvement with the Federal Reserve. Thus the
> government has weak control over the actions of the Federal Reserve.
> All banks in America are members of the Federal Reserve System and
> all paper money is printed by the Treasury per the amounts ordered
> by the Federal Reserve. All electronic money, wires, credit cards,
> debit cards etc and all check book money, is also under the monetary
> policies of the Federal Reserve. The Federal Reserve controls how
> much money, (cash, electronic, check book,) banks have on hand through
> its regulations and membership requirements. It maintains this flexibility
> so that it may meet the liquidity demands of banks.
>
> WaMu was the largest thrift in America and part of the Federal Reserve
> System. WaMu had some no pay and slow pay mortgage loans, like most
> banks in America today. These loans were not an overwhelming problem
> for WaMu, as they had cash reserves enough on hand to last two years
> at the current bad loan rate.
>
> After the Dot Com bubble burst in 2001, the Federal Reserve lowered
> interest rates to make borrowing more attractive, to stimulate the
> economy out of the crashing caused by Dot Com companies going out
> of business. Home loans became a primary source of lending customers.
> Competition was high and banks lowered requirements to receive loans,
> to make business and to get as big a share of the business as they
> could. The least stringent home loans were known as subprime loans,
> as they were made to other than prime customers. Loan strategies
> such as ARMS and HELOC were used. Often the mortgages were structured
> with low payments up front, and higher payments in the later years.
> Often these mortgages were sold to other lenders after they were
> written, and WaMu had purchased a lot of their mortgages. Over the
> years some subprime customers lost their ability to make their payments
> on time. As payments rose some borrows could not pay. Now of course
> banks are regulated, they have to keep loss provisions, they have
> to lend appropriate amounts to appropriate people, or else they put
> borrowers, investors and depositors all at risk. The OTS and FDIC
> are two of the government agencies that regulate banks. Regulation
> was lax through out the system during this period and many banks
> did things which regulators should not have allowed. Incredibly one
> OTS regulator, Darrel Dochow, who was demoted in the 1990's for misregulating
> the infamous and seized Lincoln Savings and Loan, was also in charge
> of Washington Mutual, Countrywide, IndyMac and Downey Savings and
> Loan, among other banks that have been seized or sold of late. His
> lack of regulating skills which tend to need to be followed up by
> a bank seizure are a definite part of the current financial crisis.
> If regulators did their jobs and enforced banking regulations, seizures
> like WaMu, and much of the current financial crisis could have been
> avoided.
>
> A bank’s assets are its loans, because loans are where people owe
> you money plus interest, an income stream. Deposits are a liability,
> because the bank owes the depositor the money, plus interest, and
> is liable for its payment on demand.
>
> Insolvency is when a person or company can not meet the current obligations
> or payments on their debts, using whatever capital means they have
> available to them, including selling assets. WaMu borrowed money
> from citizens like all banks in many forms, Cds, secured bonds, unsecured
> bonds etc. to get money to do its business. WaMu was perfectly able
> to make the interest payments and redemption payments on its debts.
> WaMu was not an insolvent or bankrupt bank. WaMu held a lot of small
> deposit accounts, and depositors make withdrawals, thus liquidity,
> having funds available on hand for withdrawals was WaMu’s primary
> concern.
>
> Bankruptcy is a courts legal recognition of a company's insolvency.
> There are three types of bankruptcy, Chapter 7 liquidation, Chapter
> 11 reorganization, and Chapter 13 which is a personal bankruptcy.
>
>
> Liquidity is when the cash on hand and current income stream is able
> to meet or beat the current debt service and other liability requirements,
> without having to sell assets. When the OTS said WaMu had "insufficient
> liquidity to meet its obligations" they were stating an opinion based
> on if everyone withdrew their money at once. Actually no bank has
> that kind of liquidity as the fractional reserve system rejects that
> principle. It has now become know that there was a system wide rush
> of withdrawals the week after the Lehman bankruptcy and this begs
> the question during that week how bad were WaMu's liquidity ratios
> compared to the other banks liquidity ratios for that same week.
> Was WaMu the only bank with "insufficient liquidity to meet its obligations"
> that week and why was only WaMu targeted for seizure.
>
> As subprime loans fail to pay, a bank is losing its income stream,
> or it is losing its liquidity, as the monthly checks are not showing
> up. Less money coming in means less is available to pay the monthly
> interest to bond holders, Cds, savings deposits and also for customer
> withdrawals and redemptions etc. WaMu’s liquidity was slowly shrinking
> due to its subprime loan failures, but it was not at a problem level,
> and WaMu was seeking solutions. In March 2008, JPMorgan Chase offered
> to buy WaMu for $8.00 a share, hoping the bank would accept it as
> a way out of its creeping liquidity problem. WaMu declined and instead
> on April 8th took a seven billion dollar cash infusion, two billion
> from an investment firm TPG Capital, in trade for 822,857 new common
> shares at $8.75, with the remainder preferred shares convertible
> to common shares, and five billion from other investors in trade
> for new common shares. Total new common shares issued at the onset
> of this deal being 176 million, and more created when the preferred
> shares converted. See Note 9 on the bottom of page 21 here. David
> Bonderman the CEO of TPG had been on the WaMu Board of Directors
> from 1997-2002. With this new deal he once again became a member
> of the Board of Directors. Another part of the deal was that WaMu
> had to accept an anti-dilution clause wherein if WaMu sold itself,
> or issued new shares worth over $500 million, for less than $8.75
> a share, within the next eighteen months, TPG would be paid the difference
> against their shares. Shareholders disliked this whole deal, but
> they approved it to avoid stiff built in penalties. Although this
> cash infusion helped, there was a liquidity problem for WaMu in July
> 2008 when IndyMac failed. In September 2008 WaMu made the decision
> to find a buyout partner from a bank with better liquidity so the
> merged bank would have adequate liquidity in the face of a growing
> credit crunch. On September 8th they hired a new CEO Alan Fishman.
> On September 17th they announced they had chosen Goldman Sachs as
> a broker to find a buyer and work out a deal. On this same date TPG
> waived its anti-dilution clause to help facilitate the sale of WaMu.
> There were five to seven major banks interested, including Banco
> Santander, Citigroup, HSBC Holdings, Toronto-Dominion Bank, Wells
> Fargo and JPMorgan Chase again.
>
> Other banks were in a similar situation. Congress under pressure
> from both the Federal Reserve and the Treasury was being urged to
> authorize government funds to bailout the banks with the subprime
> loan failures and thus the increasing liquidity problems. The idea
> at the time was the government would create new government obligations,
> bonds of various term lengths, and swap these for the banks’ subprime
> loans. As the government has the ability to control tax revenue by
> increasing taxes, its ability to pay its debt obligations is the
> highest you could have, because it can and does enforce the payment
> of taxes. If it needs money to pay a debt it increases taxes. The
> government would put itself in charge of collecting the subprime
> debts as well, and defaults are more easily absorbed by them as they
> are also offset by its tax collecting abilities.
>
> The bailout swap plan would insure the banks current income streams
> would increase as all payments would be made, and also be quite certain
> going forward as the government is not likely to go out of business.
> This plan is essentially the $700 billion bailout plan that was being
> discussed in Congress at the time. This plan would strengthen WaMu
> considerably, and even to the point where some were speculating WaMu
> would not have to sell and could continue on as an independent bank.
> It also made WaMu and all the banks a much better investment or merger
> candidate as much more of the loan portfolio value and income streams
> would be certain, and known. In the first week Goldman Sachs had
> been unable to find WaMu a buyer. The one huge obvious problem was
> the bailout talks and what their results would be, and the end effect
> that would have on the income value of WaMu's loan portfolio. There
> was another problem too though. Unknown to anyone the FDIC had already
> been offering WaMu secretly to the same potential customers that
> Goldman Sachs went to, but as a branches, deposits and loan portfolio
> only sale, free of all financial obligations to bond holders and
> of all claims of shareholders, to be done by private auction, and
> implemented by a WaMu bank seizure. This had killed WaMu's chance
> to find a buyer from another bank, and WaMu was now talking to two
> private equity firms, the Blackstone Group and the Carlyle Group,
> to see if they would be interested in buying the bank.
>
> WaMu’s average account was only $5,200.00, well within the FDIC insurance
> range. In aggregate these FDIC insured accounts were much more in
> dollars then the FDIC had in cash to pay insured depositors. Since
> if it ever came down to it, the FDIC would be unable to make good
> on its insurance plan, without borrowing from the Treasury, the FDIC
> had offered outwardly to help Goldman Sachs in brokering a deal for
> a buyout of WaMu. As soon as the rates being received for the subprime
> loans in the bailout was known the banks could then establish a value
> and price for the bailed out WaMu. This makes sense, and this is
> what investors were told and thought, but the main potential customers
> already knew WaMu was to be seized and auctioned, and for that to
> work it had to occur before the bailout. It was not WaMu that had
> the liquidity problem, it was the FDIC that had the liquidity problem,
> and the FDIC chose to protect what little liquidity they had by preemptively
> and unjustly seizing WaMu. The FDIC decided to avoid any chance of
> being caught short of cash, and used their regulatory powers to transfer
> their cash problem onto the WaMu shareholders and debt holders by
> wiping out their investment positions.
>
> The White House and Congressional Finance Committee members began
> discussing the bailout together on Wednesday September 17th, the
> same day that WaMu announced that it was for sale. The actual Congressional
> hearings were started the next day, and were held everyday thereafter.
> The bailout, now known as The Emergency Economic Stabilization Action
> (seekingalpha.com/symbo...) of 2008, was passed Saturday
> October 2nd and made law on Sunday October 3, 2008. The first and
> only implementation of bailout funds so far was the purchase of preferred
> shares in twenty-five US banks. This was a bailout technique that
> England had recently used for their credit crisis.
>
> Just previous to the initiation of the bailout proceedings, due to
> falling stock prices in financial issues, and most of the banks,
> for the entire year, thirty day bans on short selling were introduced.
> The first one announced Tuesday July 15th was on nineteen finance
> stocks, and solely a ban on naked short selling. Kerry Killinger
> then CEO of WaMu had asked Treasury Secretary Henry Paulson to put
> WaMu on that list, but he was denied. On Wednesday September 17th
> naked short selling was banned on all stocks, and on Friday September
> 19th all short selling of any kind was banned on 799 finance stocks,
> and this was good until Thursday October 2nd, and has since been
> expanded and extended. WaMu was on the list of 799 finance stocks.
> All short positions on the 799 stocks had to be closed out within
> three days, and thus be covered by the market close of Wednesday
> September 24th. Manipulation is the reason the SEC issued the short
> bans. Hedge Funds and other shorts can drive a stock price down and
> profit from the free fall, or on options, or buying to go long at
> a reduced price, and it is possible with enough coordination to drive
> a company out of business and take it over. Currently shorting is
> very viable as the uptick rule was removed and naked shorting has
> been allowed. It is interesting to note that there was little short
> covering in WaMu, thereby disobeying a SEC order, and that the bank
> was coincidently seized the day after all shorts should have been,
> but were not, covered. It has now known that the shorts covered early
> in the post seizure trading and only had to pay pennies a share to
> cover, and made huge profits. When the uptick rule is in place and
> naked shorting disallowed most people have no problems with short
> selling. Shorting provides a counter balance to longs and when regulated
> well can be a stabilizing influence on a stock's price. Shorts sell
> stocks at high prices and buy them at low prices and profit the difference.
> When stocks drop, shorts buy, creating demand at low levels and slowing
> and reversing descents, coversely when stocks soar, shorts sell,
> and reduce run away inflation of a stock price.
>
> On Thursday September 11th WaMu provided an Update on Expectations
> for Third Quarter Performance (link), with the official results scheduled
> for Wednesday October 22nd. This is part of their release, "The company
> expects its capital ratios at quarter-end to remain significantly
> above the levels for well-capitalized institutions and continues
> to be confident that it has sufficient liquidity and capital to support
> its operations while it returns to profitability. Net interest income
> is expected to be in line with the second quarter. The third quarter
> provision for loan losses is expected to be approximately $4.5 billion,
> down from $5.9 billion in the second quarter while reserves are expected
> to build, as described in greater detail below. Net charge-offs are
> expected to increase by less than 20 percent in the third quarter
> compared with a growth rate of nearly 60 percent during the second
> quarter. Non interest income is expected to be approximately $1.0
> billion, up significantly from the second quarter, reflecting continued
> growth in depositor and retail banking fees (up 6% from the second
> quarter) as well as stronger MSR results due to slower prepayment
> speeds. Non interest expense is expected to be down approximately
> $200 million, reflecting expectations for lower resizing costs and
> lower foreclosed asset expense." It also had this to say about its
> Liquidity and Capital Retail deposit balances at the end of August
> of $143 billion were essentially unchanged from year-end 2007. In
> addition, the company continues to maintain a strong liquidity position
> with approximately $50 billion of liquidity from reliable funding
> sources. The company's tier 1 leverage and total risk-based capital
> ratios at June 30, 2008 were 7.76%, and 13.93%, respectively, which
> were significantly above the regulatory requirements for well capitalized
> institutions. The company expects both ratios to remain significantly
> above the levels for well-capitalized institutions at the end of
> the third quarter.
>
> In general things were the same or better than the previous quarter.
> The worst thing was the small detail that deposit levels had not
> increased since the end of 2007, which was not a big deal, considering
> possible benefits from the bailout and also especially a buyout,
> once the bailout details were known. Note both capital and liquidity
> were well within acceptable limits.
>
> On Monday September 15th Standard & Poors issued a downgrade
> of some of WaMu's bonds, but made this positive statement about their
> liquidity. " WAMU's overall liquidity profile at the bank and the
> holding company is positioned to withstand this weak credit cycle
> through the end of 2010. During the past year, WAMU has conservatively
> and prudently managed its holding company liquidity position. It
> faces minimal debt maturities through the end of 2009. WAMU reaffirmed
> that its outstanding debt is not subject to rating triggers or other
> terms that would cause acceleration."
>
> Also on September 15th, Lehman Brothers, the fourth largest investment
> bank in the US, declared Chapter 11, bankruptcy reorganization. Lehman
> Bros was an investment bank, not a depository bank. It was the largest
> bankruptcy in US history. It was a first in a major Wall St firm
> declaring bankruptcy in recent memory. Bear Stearns another large
> investment bank in March 2008, had come close to bankruptcy, but
> the government worked out a deal for them where JPMorgan Chase ended
> up purchasing Bear Stearns. The Lehman Bros bankruptcy put everyone
> on edge.
>
> On September 18th Alan Fishman the new CEO released a letter (pdf
> link) to shareholders in which he stated "Capital ratios describe
> the financial strength of a bank. Our ratios continue to be well
> in excess of the levels that government regulators require of “well
> capitalized” institutions. We also have an ample supply of funds
> on hand to meet your needs and the needs of our other customers and
> our day-to-day operations." That the WaMu bank was well capitalized
> has never been disputed and the OTS in a Fact Sheet (pdf link) they
> issued on WaMu on September 25th 2008 said "WMB met the well capitalized
> standards through the date of receivership."
>
> Thus going into the week of Thursday September 25th for WaMu there
> were expectations of large short positions covering and a possibly
> beneficial outcome to the bailout meetings, and regardless, shortly
> after a buyout merger. The total amount of outstanding shares short
> was 26% of the float, or about 420,000,000 shares. Who were these
> shorts? Did JPMorgan Chase have a large short position, did Citigroup?
> The three credit ratings services all gave WaMu debt downgrades during
> the week, first by Moody’s on Monday September 22nd, then Fitches
> on Wednesday September 24th and finally Standard & Poors on Wednesday
> evening September 24th. Essentially they were all downgrades from
> junk to junkier. Some people saw this as window dressing being done
> before the bailout was passed, and that it was being done so that
> whatever plans the bailout came up with, the debt would be freshly
> rated for carrying out that decision making. Many did not see it
> as a panic situation for this reason, and when one service down grades
> you, the others always automatically follow.
>
> One issue of the bailout meetings was the rate at which the government
> would swap for the subprime loans in the plan then under discussion.
> Should it be the hold-to-maturity value, ie the full anticipated
> value when issued for its maturity or some reduced or discounted
> value, particularly the current market value, known as mark to the
> market, as determined in their distressed current condition and its
> effect on their current trading levels. Both Federal Reserve Chairman
> Ben Bernanke and then Secretary of the Treasury Henry M. Paulson,
> Jr., were quite clear and stressful when speaking publicly about
> this that the subprime debt should be purchased at hold-to-maturity
> or full value to adequately capitalize the income streams and liquidity
> to the receiving banks so that they would be in a strong position
> to generate business at the local levels and keep the economy from
> slipping into a recession. They also stressed for similar reasons
> that the bailout should insure that no large banks fail, and that
> numerous small bank failures would not be acceptable either. WaMu
> was the largest thrift in the nation and all indications were that
> it was a prime candidate to succeed from the bailout. WaMu though
> made it clear that if a merger was not completed before the bailout
> they would continue to look for a merger partner in any case. As
> events unfolded the sincerity of those that made remarks concerning
> no large bank failures has to be questioned, and it has to be questioned
> if they were deliberately misleading the investing public. In general
> bank share prices drifted downward as the bailout meetings got underway.
> There was bickering, Pres. Bush invited both Senators McCain and
> Obama to a White House meeting that ended chaotically. I personally
> was unable to watch the hearings on TV, but those who did, did not
> seem inspired. The expected short squeeze in WaMu from the SEC ban
> on shorts in financials had not materialized. It should have taken
> seven days at recent typical daily volume levels for the number of
> known shorts to cover. Volume levels for the 22nd, 23rd and 24th
> do not show this short covering. There was higher volume on the 25th,
> but not enough for the shorts to have covered, and this volume was
> all related to the sell off from that days seizure talk and actual
> seizure. If JPMorgan Chase or Citigroup or their confidents had been
> a major shorter of WaMu they had not covered. Strangely the SEC and
> no one in government has had anything to say about this.
>
> Wednesday evening September 24th President Bush gave a televised
> speech to the nation on the economic problems and the bailout. One
> remarkable statement he made was that the subprime debt would be
> purchased at current market, very depressed, prices. This was the
> exact opposite of what the Federal Reserve and the Treasury had been
> saying. It also seemed to contradict the purpose of doing a bailout.
>
>
> Thursday September 25th was in general a day bank shares drifted
> down and the hearings produced no results. WaMu's stock began falling
> within the first hour, and this was attributed to the downgrades
> of the previous day and evening. I worked that morning, and was not
> at my computer until after the regular trading. I do not watch CNBC
> either, but during the day CNBC reported they had leaked information
> that WaMu would be seized by the FDIC as a bank failure. They did
> not report a source for this leak. This leak accelerated both the
> large retail online withdrawals of deposits from WaMu and the falling
> stock price for the day for WaMu. WaMu’s stock fell almost a whole
> dollar and 35% for the day. I remember getting home in the early
> afternoon west coast time, and the market had just closed. I was
> taken aback by the dollar drop for the day. Looking on the message
> boards I thought I understood the sellers concerns, but believed
> that the government would prevail. No one mentioned a seizure. This
> was the mindset that week, in fact Warren Buffett considered one
> of the best investors going, had late Tuesday September 23rd bought
> $5 billion dollars of Goldman Sachs stocks for essentially the same
> reason. As by now all shorts were supposed to be covered and out
> of the market, even though there was no evidence this ever happened
> in WaMu, the steep fall in price was being partially explained as
> due to this normal braking mechanism to the market having been removed.
> I looked at an early after hours quote and it was a few pennies from
> the regular market close of $1.69. I surfed onto some noninvestment
> things. To me it was less than an hour later when I checked back
> again and the quote was $0.52. A drop of another dollar and two dollars
> for the day. I went to the Yahoo WM message board and began looking
> at posts. Some people were up in arms, some people said it was oversold
> panic selling etc. I stayed and watched the posting and began reading
> news sites for news. First there were posts on WaMu closing. This
> made no sense. I saw a post where the word seized was used. It had
> only one news source anyone could find backing it. I was unaware
> of CNBC’s earlier reporting in the day.
>
> WaMu’s price by now was at about $0.16 where it would close, though
> it did go as low as $0.09 from my memory. It was discussed what they
> meant by seized. At about this time after hours trading ended. There
> was a strange spike in the final minutes of trading when someone
> bought 272,000 shares at $1.69, the regular market close and ten
> times the current price. This has never been explained, some suggested
> that someone on the inside had gotten trapped in the avalanche after
> hours and was rescued by his bank buddies at the end, others think
> someone just mistyped a buy at market order, leaving off the leading
> zero. As soon as after hours trading had closed there was suddenly
> a storm of news stories about the seizure and we learned the following.
> Most investors understood that Washington Mutual Inc was a holding
> company trading under the symbol WM and that the holding company
> was the owner of the Washington Mutual Bank. The shares were shares
> of the holding company, not the bank. Many banking companies are
> set up this way and here is a list of the top fifty bank holding
> companies. The OTS and FDIC recognized this as well and chose to
> exploit this corporate structure. Without a public word they realized
> that the WaMu bank could be seized and that the shareholders and
> debt holders of Washington Mutual Inc. would lose the primary asset
> of their company, but that their claims would not be directed at
> them for the possession of the asset, but rather would be directed
> at the holding co, which they owned shares in. Had everything been
> exactly the same for the WaMu Bank, but that the shares and debts
> been in the bank’s name and not the holding companies, it is likely
> the bank would not have been seized. That the corporate structure
> allowed a loophole to screw the shareholders and debt holders is
> really the reason the WaMu bank was seized. At about 7:00pm JPMorgan
> Chase announced they would be holding a Conference Call at 9:15pm.
> The conference call was used to announce to the world they now owned
> WaMu. JPMorgan Chase also released this press release that evening,
> and later this presentation (pdf.link).
>
> JPMorgan Chase is one of the primary stockholders of the Federal
> Reserve which means they have the power to force favors from the
> Federal Reserve. The CEO of JPMorgan Chase, Jaime Dimon, sits on
> The Board of Directors of the Federal Reserve Bank of NY. Citigroup
> is also a stock holder of the Federal Reserve. It is the Federal
> Reserves job to insure that its member banks have the liquidity to
> transact business. The member banks borrow and lend among themselves
> electronically every night to keep each other liquid. This is called
> the Federal Funds. If need be a bank can also borrow directly from
> the Federal Reserve itself through a process known as the Discount
> Window. The FDIC was in a jam in that if WaMu was ever deprived of
> funds from the Federal Reserve, say for fear of not being paid back,
> and a bank run ensued, the FDIC would not be able to cover the insured
> deposits without borrowing from the Treasury. There is some slight
> differences in the amount the FDIC would have had to cover. Some
> estimates leave the FDIC with a nominal balance. Apparently the thought
> of having to borrow funds from the Treasury so early in the credit
> crisis was considered too much of a defeat for the FDIC to be comfortable
> with. Unknown to anyone in the public the FDIC was working on a secret
> solution deal. On one hand they were talking with WaMu about helping
> them find a buyer and the valuation of its loan portfolio, and secretly
> on the other hand they were allowing JPMorgan Chase and the other
> banks to have complete access to WaMu's books and were offering to
> seize the bank and sell it to them in a private auction, which would
> free the purchaser from all liabilities to the debt holders, and
> all claims from shareholders. This would get the FDIC out of their
> jam. The words Toxic Paper, Toxic Debt, Toxic Loans etc suddenly
> were all over the newspapers and the internet. The idea that the
> FDIC’s cash balances could not make good on its insurance liabilities
> was being well advertised, but their credit line and credit abilities
> with the Treasury were seldom mentioned. Though borrowing from the
> Treasury would make the FDIC solvent, accounts over $100,000 would
> still lose everything above $100,000. These accounts read the writing
> on the wall and began silently electronically removing their funds
> from WaMu. As mentioned the Federal Reserve inspectors would be on
> hand to witness this day by day. WaMu’s cash on hand and hence liquidity
> was being drawn down. Did the Federal Reserve step in and loan them
> this liquidity as the system is set up to do for just these type
> of incidents. No they did not (pdf link). Was the reason because
> WaMu still had plenty of liquidity left, or was there some cooperation
> going on between the Federal Reserve, the FDIC and the Treasury?
> This all occurred as the Congressional bailout meetings were underway.
>
>
> Once the bailout was completed, the plan being discussed, would have
> WaMu’s bad subprime loans swapped out for good government paper,
> maybe some at 100%, maybe some at a discounted level, maybe some
> at market level. WaMu’s improved condition in any case would make
> it a much more solid purchase after the bailout then before. WaMu
> was being set-up in a triangulation of cross fire, between the Federal
> Reserve, the Treasury Department's OTS, and the FDIC, to affect a
> seizure and a fire sale at auction. The beneficiary’s of this would
> be the FDIC, which would be removed of the potential problem of having
> to go into debt to the Treasury if it ever needed to pay the insurance
> on WaMu's deposits, the Treasury which would now not have to considering
> ever loaning the FDIC any money to cover the deposits, and the big
> winner the Federal Reserve/JPMorgan Chase which ended up owning WaMu,
> its loan portfolio, its badly needed cash deposits, and its jewel
> of branch networks, free of all debt holder obligations and claims
> of shareholders.
> There is also the consideration that JPMorgan badly needed the cash
> from the deposit base of WaMu to help shore-up its very leveraged
> derivatives trading transactions. JPMorgan's acquisition of Bear
> Stearns, also done with the government's help, is thought to have
> been done for this same reason. If JPMorgan were ever unable to fulfill
> their ends of their derivatives trades, and collapse, it is thought
> it would bring down all of Wall St and the economy. Some of these
> trades were with WaMu and these trades would self cover and cancel,
> just as it was done with their Bear Stearns trades. Thus the actions
> of the OTS, FDIC and Federal Reserve may not be entirely about money,
> but also about their reputation and their performance of duty, and
> that they chose to kill off WaMu to save their own necks by helping
> to save JPMorgan's neck. WaMu’s parent company Washington Mutual
> Inc shareholders and debt holders though were forced into taking
> an unjustified catastrophic and total loss.
>
> Probably the single worst thing about the WaMu seizure was it destroyed
> the financial order of American capitalism for finance companies
> by removing the rights and claims of all investors on the corporation,
> and in turn removed the priorities in rights and claims of the different
> securities issued by finance corporations and purchased by investors.
> John Hempton who blogs for the Bronte Capital Blog said it well in
> his September 28, 2008 entry The Reckless, Irresponsible Seizure
> of Washington Mutual. "Now there is not much raising of wholesale
> funds by banks at the moment. But after this deal there is likely
> to be less. It is simply the case that there is now a new risk for
> people who provide wholesale funding – and that risk is that the
> government will unilaterally abrogate their rights – without appeal,
> without due process and without accountability....that the most important
> function of government in a capitalist society is provision of a
> framework by which property rights can be defined and enforced as
> this is the key to making a capitalist society function....The Government
> is now acting as if the framework does not apply to them....That
> is bad whatever your political persuasion....But in the process they
> have doomed about two thirds of the US banking system....heaven help
> us." Please read the entire entry at the link.
>
> Thus the Federal Reserve watched WaMu, while knowing their own stockholders,
> JPMorgan Chase and Citigroup, were participating in secret backroom
> discussions with the FDIC wherein it was decided the Treasury Department's
> OTS would seize WaMu for "lack of liquidity" and give it to the FDIC
> who would have it auctioned off in advance. Included would be the
> branches, deposits, and the loan portfolio including subprime mortgages,
> which were eligible to wash off as a write down to the final amount
> paid, and what was not written down and washed off, would be eligible
> for swaps under the bailout plan. All for a fire sale private auction
> price, and leaving WaMu Inc the holding company hanging onto all
> the obligations to the bond holders, as well as all the obligations
> to the preferred shareholders, and all claims by common shareholders.
> The winner, at $1.9 billion was JPMorgan Chase. JPMorgan Chase was
> able to take a $31 Billion write down on the subprime mortgage loans
> as part of the deal, even though WaMu had previously calculated $19
> Billion as the bad loan amount. The unsecured mortgage loans JPMorgan
> took and could not write down are still eligible for the federal
> bailout plan. JPMorgan also got the WaMu bank branches throughout
> the west and south they had wanted so badly. If JPMorgan Chase or
> any of the other banks in the secret dealings had major short positions,
> they had not covered. When WaMu’s stock price collapsed after the
> seizure, they could cover for cheap, or maybe just be able to hide
> the fact. When a company declares bankruptcy shorts do not have to
> cover - it is game over. That a lot of the shorts never covered in
> WaMu and that certain large banks were privy to the FDIC’s plan to
> seize and close the bank, would make it simple for these banks, their
> friends, confidants, and all their proxies, to never cover their
> shorts and keep a large profit. This would help cover a lot of bad
> derivative trades and may be why it is not being discussed. That
> nothing has been written about this makes it even more likely this
> is what happened. This would be insider trading, an illegal act.
> As Congress discussed the bailout on Thursday September 25th, and
> after regular market hours, the OTS seized control of WaMu, and turned
> it over to the FDIC who immediately turned it over to the auction
> winner JP Morgan Chase. This was announced after all trading had
> ended simultaneously as one single packaged story. Bank seizures
> are traditionally done on Fridays so the weekend can be used to sort
> out the paperwork and details. Investors planning to watch WaMu's
> Friday trading action and planning to decide whether to hold or not
> considering a possible Friday seizure were robbed of the opportunity.
> The OTS/FDIC said they chose Thursday because of the leaked seizure
> report being circulated, and thus imply that a very real potential,
> a final agreement to the bailout meetings on Friday, was not a consideration.
> They say they feared the leak would increase the rate of withdrawals
> leaving WaMu that Friday. This has to have been one of the most valuable
> leaked reports in American history and one wonders if those who benefited
> so handsomely from it may have also been those who started it. As
> a further deflection, although a loan swap had been sold to everyone
> as the bailout all along, the Treasury pulled a surprise on everyone
> after the bailout was passed and did a preferred stock purchasing
> plan instead. Was this to distance themselves from the WaMu take
> down and modus operandi behind it?
>
> JP Morgan Chase had at least three weeks to prepare their bid, during
> which time they had at least seventy-five of their own people crunching
> numbers and working forecasts, using the data WaMu had supplied to
> the FDIC under the understanding that the FDIC would help them facilitate
> a buy-out merger transaction. Bids were submitted on the 23rd and
> the FDIC notified JPMorgan Chase they had the winning bid on the
> same day. The $1.9 billion was paid to the FDIC, who say it will
> be used to toward paying off the debt holders.
>
> J.P. Morgan becomes the country’s largest bank by deposits, with
> more than $900 billion in deposits, and second largest overall. They
> added WaMu's 2,239 branches in 15 states, many in key states where
> they had little or no presence, like California, Oregon, Washington
> and Florida and becoming stronger in states where they were low and
> mid level players, like Texas, Colorado, Utah and Illinois.
>
> J.P. Morgan acquired all of the assets, all of the bank branches,
> and all of the deposits of Washington Mutual Bank and nothing of
> the holding company’s Washington Mutual Inc. Washington Mutual Inc
> retained only the senior unsecured debt, subordinated unsecured debt,
> and preferred and common stock. Due to the seizure, the next day
> Friday September 26th Washington Mutual Inc filed for Chapter 11
> bankruptcy, a reorganization, and listed assets of $32.9 billion,
> and total debt of $8.2 billion. Much of the assets were shares of
> the seized bank valued at the preseizure price.
>
> A little needs to be said about bank deposits. To a bank, bank deposits
> are a liability because the bank owes the money, plus the interest
> promised, back to the depositor. This is obviously true. What needs
> to be considered is that the banking system is based on fractional
> reserves. When a bank receives a thousand dollars in deposits it
> gets to lend out, most of the money, at a higher interest rate than
> it pays depositors. In the USA the reserve requirement is about 10%
> (10.3% actually). The bank receives say a thousand dollars, promises
> 2.5% on it, loans out $900 and receives 7.5% on it, and keeps the
> difference. If money the bank has loaned out, is redeposited back
> into the bank, they can repeat the process with that deposit. Banks
> make good money off of the deposits. Banks do a lot of advertising
> and customer service benefits to get people to deposit money at their
> bank. It is a slow trudging process to build up a banks depository
> base. When JPMorgan Chase received $188 billion in WaMu deposits,
> the amount of deposits on the date of seizure, for a $1.9 billion
> payment, plus all the WaMu assets, it was a huge steal of a deal.
> Now consider that to build deposits a bank has to be located in areas
> convenient to entice depositors to deposit with them. The bank needs
> a branch network. This is a costly, slow to build, trial and error
> system that generally takes years and decades to create. It is a
> highly valuable asset. JPMorgan Chase also got all of the WaMu bank
> branch system as part of the deal. Also as part of the deal they
> got to write off all the bad loans they felt WaMu had on its books,
> $30.7 billion was the figure they agreed to. JPMorgan also got WaMu's
> two credit card companies, one WaMu had long maintained, and Providian
> a leading credit card issuer purchased by Washington Mutual for approximately
> $6.5 billion in October 2005. So JPMorgan's risks were all washed
> away and their benefits were enormous, and they paid a measly $1.9
> billion for the whole deal. It was the WaMu investors who paid for
> this deal, by receiving nothing for their bank's deposits, loan portfolio,
> real estate, branch network, and credit card businesses, a total
> robbery.
>
> The mortgage assets JP Morgan acquired were $176 billion of WaMu’s
> home loans. Those assets were immediately written down by 19%, or
> $30.7 billion. Leaving JPMorgan with a cool $145 billion dollars
> of good assets, some that are eligible for the bailout plan, for
> which they paid less than $2 billion dollars, and this does not include
> the real estate and other assets. The only liabilities they took
> were the deposits. A few weeks after the dust settled from the seizure
> it was revealed that WaMu Inc., the holding company, had $4.4 billion
> dollars in accounts in the WaMu bank. The FDIC tried to claim this
> money in court as part of their receivership, but the courts ruled
> it belongs to WaMu Inc. If WaMu Inc, the holding company, had been
> invited to the secret private auction, and bid the balance of just
> these accounts, as most people think they gladly would have, they
> would have won and beaten JPMorgan's bid by more than two times.
>
>
> JP Morgan expects the deal to generate $12 billion dollars over the
> next three years, or $4 billion dollars a year, making them a 100%
> profit on the deal in the first year, and an additional 200% profit
> every year from then on. Thus the increase in earnings per share
> will be immediate and is expected to be between $0.50 and $0.70 a
> year, starting in 2009 and every year thereafter. The owners of the
> company, the Washington Mutual Inc shareholders, received zero dollars
> on their shares, and they now trade at around three cents. They had
> their primary asset preemptively confiscated and sold, for less than
> two cents on the dollar, which they do not even receive, for the
> so called reason that it suffered occasional short term liquidity
> problems and those whose duty it was to help them out with liquidity
> problems didn’t want to, and the FDIC that guaranteed some of its
> liabilities didn’t want to take the extremely unlikely and extremely
> short-term and extremely slight risk that they may need to pay on
> their guarantees should WaMu actually not be able meet withdrawals
> before possible benefits from the bailout began and/or a buyer was
> found and the bank sold off at a fair value. Though simply giving
> WaMu depositors a temporary increase in FDIC insurance coverage would
> have been all that was needed to remove this one highly unlikely
> potential problem. Unless of course they felt some extremely powerful
> outside force could precipitate this problem. The bailout which at
> the time was about to be passed in the forth coming week, maybe even
> the next day, would have possibly eliminated this problem, and the
> mere completion of the bailout would have cleared away the final
> unknowns in the way of a buyout merger. Although in reality the buyout
> option had already been secretly sabotaged and ruined by the FDIC's
> secret auction agreements, leaving them no choice but to finish with
> seizing the bank and it would look a lot better done before the bailout
> was passed. The liquidity problem would have taken weeks or even
> months to occur even without a bailout and only if the worst happened
> or a media campaign was done, and WaMu remained abandoned. Yet because
> of a news leak the OTS justified seizing WaMu immediately before
> the bailout passed. The seizure and its timing also hugely benefited
> the brazen uncovered shorts, whomever they were. Washington Mutual
> Inc and its shareholders were set-up by WaMu's family and friends
> and then robbed and murdered by them. The whole WaMu take down was
> accomplished by subterfuge, sabotage, deceit, propaganda, lies, illegitimate
> seizure, done irregularly, on the sly, in secret, in darkness, under
> camouflage of smoke and mirrors, on leaked news, and ended solely
> to the financial advantage of the FDIC, the Treasury Dept, the Federal
> Reserve/JPMorgan Chase, the uncovered shorts, and those rich enough
> to keep over $100,000 in their bank accounts. WaMu shareholders were
> totally wiped out. It was a thirty billion dollar rip off.
>
> To add insult to injury after EESA 2008 was made law on October 3rd
> 2008 JPMorgan Chase became one of nine banks to receive money from
> the EESA funds in exchange for preferred shares created especially
> for this purpose. On October 14th JPMorgan Chase received $25 billion
> from the EESA funds. In effect the government paid for JPMorgan Chase
> to take over WaMu and then paid them a $23 billion bonus for doing
> it, on top of the write offs. WaMu would not have even needed $23
> billion in mortgage guarantees to be effortlessly merged and preserving
> the shareholders and bond holders investments and the soundness and
> thus confidence in the US financial system. It was a tragic move
> by the FDIC.
>
> For those who say WaMu made bad loans and so the deserved to be taken
> down, it isn't true. WaMu's bad loan rate was 3.62%, that is not
> enough to justify the trillions of dollars sucked out of the economy
> by the WaMu catastrophe. Further more JPMorgan Chase is drowning
> in bad derivative trades, far more than WaMu's bad home loans. It
> is more moral to make a bad home loan, which leaves a house and a
> place for someone to live, then it is to lose even more billions
> in bad derivative trades which leave nothing but worthless paper.
> WaMu deserved government assistance more than JPMorgan Chase.
>
> For another perspective on WaMu consider that IndyMac, a bank about
> 10% WaMu's size, was seized and later sold for $13.9 billion. Wachovia
> Bank which the FDIC threatened to seize and tried to force into a
> sale to Citigroup for $2.1 billion, almost the same price as JPMorgan
> paid for WaMu, was sold within a week to Wells Fargo without any
> government assistance for $15.4 billion. There were details to these
> sales, and there were considerations, but WaMu was easily as viable
> as either of them, and with a little financial finesse, seized or
> not, could have easily been sold for considerably more as well.