The Washington Mutual "speed bankruptcy" seems like a good model for the rest of the industry. The FDIC took over the bank, wiped out the shareholders, and immediately auctioned it off to JP Morgan who paid $1.9 billion. Depositors are secure.
Notice that to do the deal, JP Morgan raised $10 billion in the equity markets and their shares rose. Moreover, the issue was oversubscribed so they may go back for more. All this illustrates that at least some of the substitute bridges from savers to investors that I have talked about continue to work (on the latter point see also Arnold Kling and Steve Landsburg).
Hat tip to Garrett Jones.
It’s easier to pull off things like this when the regulator is only or mostly a single entity. OTS has been shopping WaMu for weeks, look at all the rumors.
That is what the FDIC and OTS always do with seized banks – not really a novel playbook.
This WaMu fiasco is inexcusable. FDIC is chomping at the bit to undermine investors at every turn under cover of night like Batman. This heavy-handed closeout of both shareholders and bondholders (both of which I was) is unprecendented. I believed in WaMu and the free market. If WaMu had been allowed to maintain through 2009, it and many of us would have flourished. I think time will show FDIC acted way too soon, motivated by a desire not to have to pay out of pocket to reimburse deposits, and the rest of us can go to hell. More to the point, this quick-fire marginalization of institutions by word of mouth has got to stop. If media would shut its mouth a bit, we wouldn’t have had to endure the run on deposits that freaked FDIC out in the first place. Yuck!
If WaMu had been allowed to maintain through 2009, it and many of us would have flourished.
Have you taken a serious look at WaMu’s loan portfolio? The continued their reckless lending throughout 2007 when every other bank had pulled back. They would still be dealing with toxic loans in 2009, while every other bank had cleared them out by then. They loaned $700K for a crap shack in Jacumba, CA on the Mexican border hours east of SD in 2007. If they don’t fail, then it signals to every bank “don’t worry, make all the toxic loans you want because we won’t do anything about it and we’ll bail you out in the end.”
Mark-to-market alone isn’t the problem. Mark-to-market financed by short term debt is the problem. It’s all one big margin call.
I don’t understand. If WaMu was worth $1.9 billion, why didn’t it auction itself off and distribute the $1.9 B to its shareholders?
Why does the FDIC get the money?
I doubt a bank could auction itself off publicly without causing a run. And it seems the secret auction was triggered by deposits flying out of WaMu. $17B in nine days.
I don’t think it’s weird that FDIC gets that money. First of all, it’s not equity.
I don’t think the role of greed and ego can be overstated. If WaMu had made the right offer to the right bank earlier on they would have been bought. Instead management got a sucker to give them $8B in April so they could keep control. Now they’re all toast.
From a bit of spam that’s made its way to my inbox… If there must be a bailout why not bailout every person in the country: $700B/300M people = $233,333/person. Obvious problem: causes rampant inflation. Solutions: give less (“Well golly Beaver, that doesn’t sound so bad.”), simultaneously create a savings incentive (a la what you’ve previously proposed, but more so: “You can have $10,000 cash or $100,000 in your IRA.”).
Any dislike for this proposal on uncertainty grounds (i.e., we don’t know how much to give to avoid massive inflation but also stop the crisis) needs to confront the parallel uncertainty in the problem itself. Likewise, wealth transfer critiques are faced with the problem that any bailout of any kind amounts to a wealth transfer from tax-payers to the beneficiaries.
It all seems rather glib, but seriously… why not?
I don’t understand. If WaMu was worth $1.9 billion, why didn’t it auction itself off and distribute the $1.9 B to its shareholders?
Why does the FDIC get the money?
+11111111
I fully agree that speculation is risky, but I think it’s unacceptable to assert that the writing was so clearly on the wall for WaMu. Only so for those who stayed away, which in the grand scheme is an action which contributes to the demise (a self-fulfilling prophecy). Ny neighbor for example has held all of his investment capital in money markets for almost two years — there’s just something almost un-American about it. Anyway, FDIC seizure is clearly not something anyone expects, or we wouldn’t see such huge write-downs from companies with more to lose than me. If Americans hadn’t foolishly started withdrawing assets from branches in the past few weeks (had they all forgotten that deposits are insured?) I think the picture would be very different.
More to the point, we should indeed be appalled at both the discounted price that JP was allowed to pay. Yes, WaMu should have sold earlier in the year, but at that time the entire compnay would have acquired (toxic assets and all for 4x what was just paid). No, I hold FDIC entirely to blame for hosing the wrong people in this case. Bondholders especially should never be completely overlooked.
So what happens to the “toxic assets” now? I’m not one of those people who believes that they are valueless. Does a holding company continue to exist that could conceivably recoup something over the next few decades? I mean, the collateral still physically exists… Why shouldn’t debt holders get a stake in an entity which owns that property?
I should add that the “dozens” of bad banks I refer to are only a small minority of nearly 8,500 US banks that are mostly in good condition. Now, maybe it’s really “hundreds” of banks that are bad, but I for one think it’s very worrying for American capitalism that our system lets savers’ capital stay tied up in the bad ones, like WaMu, whereas the other 90% of banks are handicapped by their conservative, low-yield investments. Another worrying fact is that any bailout will almost certainly bring a huge benefit to the bad banks, while bringing little or no benefit to the ones that were cautious. We as a country are systematically allocating our capital toward institutions that gamble away taxpayer money, and I fear we’re also leaving behind the institutions that take a conservative, long-term view.
Nick: AFAIK, there is no way for retail investors to buy MBSs (e.g. via an ETF or a mutual fund that pays the yield as dividends). It would be interesting to see what would happen if they could. Please correct me if I’m wrong about this.
MANY people could have told you so. Stop whining.
From now on, don’t invest in insolvent companies without understanding the risks.
Just wondering Warren Buffet put 5billion into Jp Morgan ahead of this seizure of WaMu, Doesnt that suggest that he already knew what was happending before any american and his investment climbed immediately when JP Morgan bought up its assets. I have not heard anything on this yet, seems like insider information that brought profit to Buffet. And if those that had stocks knew of this seizure, they would have sold them, But put it this way anyone that bought Freddie Mac shares after the takeover at .25 cents could have made a killing. selling it a $2.29.
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“Toxic Assets” book release this month on Amazon. What really went on in the Mortgage Bank Meltdown?
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