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Is WaMu on the Cusp of Failure?

Written by Nickel - 21 Comments

On the heels of news that Lehman Brothers is fighting for their survival, a Morningstar analyst commented that:

“[Washington Mutual] is the next most likely candidate to have major issues… They got into subprime lending, they got into ARMs. Their home equity book is quite large, and these losses are building and building and building… and they simply do not have the capital to absorb these easily.”

Wow, tell us what you really think. Apparently WaMu’s biggest mortgage bets are in areas with the weakest housing markets, making them especially vulnerable. Oh, and did I mention that WaMu recently entered into a “Memorandum of Understanding” with the Office of Thrift Supervision? No wonder they’ve been offering high-yield online CDs — they need capital.

The scariest part of this is that, according to Douglas McIntyre, editor of 24/7 Wall Street, a WaMu failure may be too big for the FDIC to handle alone, meaning that the U.S. Treasury Department would have to step in.

Source: ABC News

Published on September 10th, 2008 - 21 Comments
Filed under: Banking, Carnivals, Economy

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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21 Responses to “Is WaMu on the Cusp of Failure?”

  1. 1
    Alain Wong Says:

    Not to worry, WaMu is “well-capitalized.”

  2. 2
    Pascha Says:

    It will be interesting to find out! Stay within FDIC limits with their savings products, that’s for sure.

    If you are a bettin’ man, note that their stock’s trading at less than $3. It was ~$40 a year ago. Buy low, sell high? Will it be around in 6 weeks TO sell? Time will tell.

  3. 3
    iQuack Says:

    I have WaMu stock from the sale of Providian which was a sub-prime credit card issuer that had problems and was sold to WaMu a few years ago.

    So, Providian nearly crashed from sub-prime, and now Wamu is going down the same path.

    Moral: Don’t make stupid loans to slobs and creeps!

  4. 4
    John Says:

    I have a maxed-out HELOC with WaMu (legit reasons). What happens to the loan if they go down?

  5. 5
    iQuack Says:

    If/when WaMu goes down the dumper, your loan will be held by the FDIC or some other entity…………maybe another bank if, say, JPMorgan or other bank buys what’s left of WaMu.

    You’ll still owe whatever lender carries your loan, so don’t expect any favors from anybody.

    I hope all works out favorably for you, of course.

  6. 6
    hank Says:

    I have a few bucks in my MMA with them but might have to think of alternatives after this… Good write.

  7. 7
    Sharon Says:

    I signed up for their 12-month CD at 5% on August 25. They finally transferred my deposit from my checking account TODAY, 9/11.

    Ridiculous. They’re hosed.

  8. 8
    John Says:

    @iQuack That’s fine. I have no problems paying back the load, I just was worried it might get called.

  9. 9
    Eric Says:

    @iQuack and John,
    Thanks for the good info. I’ve been wondering the same thing for the past month when I first heard of problems with WaMu- figured someone would buy the loan eventually, but wouldn’t want to refinance.

  10. 10
    Adam Says:

    You’re close, but not quite there with your post. WaMu is most definitely feeling the pinch of the sub prime lending mess, and its also in a dangerous position where it could potentially fail. The stock performance is also highly troubling, in that while the stock price alone can not cause a bank to be closed it could panic the customers, whose actions could then result in the closure. While failure is far from certain, if a sufficient number of its customers were to become alarmed by its condition, its stock performance, and the general condition of the banking sector, there could be a rush to pull cash out of the institution resulting in its failure.

    As far as WaMu using inflated interest rates to attract capital, I believe you are confusing capital with liquidity. WaMu may be attempting to lock up some cash at a year or longer term to ensure it has sufficient liquidity to meet potential customer demands for withdrawals from other accounts, and may feel this additional liquidity will help it to weather a small bank panic, however it does nothing to address the capital deficiency in the institution. The capital situation of the bank currently appears to be sufficient, both in terms of the bank’s tier 1 and tier 2 capital. However, if additional write downs of loans are required in the near term this would diminish the bank’s loan loss reserves, diminishing the equity on the bank’s balance sheet and potentially ultimately leaving it with too low a tier 1 and/or tier 2 capital ratio. This could then trigger the regulators to step in and close the institutions as it would no longer be financially sound.

    With regards to the comment that WaMu may be too big for the FDIC to handle in the event of a failure, that would most certainly be true in the short term, with the Department of the Treasury needing to step up to provide liquidity to the FDIC to meet the immediate needs in covering insured deposits. Long term this may not be the case, as the FDIC would recover some of the cost of covering these deposits through the sale of WaMu’s assets. If it had sufficient assets, both in terms of performing loans, branches, and customers, the recovery could be sufficient enough to allow the FDIC to absorb this potential failure.

  11. 11
    nickel Says:

    Adam: Yes, I’m guilty of sloppy word choice. What I really meant to say is that they’re trying to raise cash.

  12. 12
    Tim Says:

    I’m a sucker, I keep buying WAMU stock. I can’t help myself. What scares me and it is a gamble on my part is that WAMU is saying they are well capitalized and that is what everyone else was saying before they failed…ahum! Bear Stearns. oh well, it’s only money, i’ll buy another 1000 shares at $2.

  13. 13
    Bill in NC Says:

    From what we saw at IndyMac it pays to have a non-performing mortgage from a lender that is taken over by the FDIC.

    IndyMac Federal suspended all foreclosure proceedings, giving those homeowners in trouble at least several more months to live in their homes.

  14. 14
    Donna Says:

    This is simply terrifying to contemplate, but I find there is some food for thought in one aspect of all of this: the size of WaMu and the capability of the FDIC. The FDIC was established at a time when there were regulations about how large one bank could get. Those restrictions were eliminated in the ‘80’s and ‘90’s, but I don’t think any changes were made with the FDIC to be able to handle supersized banks. (I could be wrong.) This bank is so large, we’re facing bringing our currency to the brink of destruction to be able to guarantee deposits. Am I the only one who is shaking in my shoes at this prospect? Were the banking regulations put into place during the Great Depression that we got rid of in the last 20 years wiser than we ever realized? I’m not an economic historian, but I’ve got a bad feeling that we set ourselves up for this by forgetting lessons learned with the bank failures of the 1930’s.

  15. 15
    iQuack Says:

    Donna, I wouldn’t worry so long as you don’t have more than $100,000 in any one bank–certainly not in a bank with known problems.

    If the government bails out sloppily managed banks, it creates a “moral hazard” that could result in future bad bank management; however, a bailout is better than an event that causes a massive run on banks or other shock to our financial system. That kind of situation is VERY unlikely.

    Depositors whose accounts are insured by the FDIC will endure NO LOSS–it’s the shareholders who have already been stung by bank stock prices that have fallen precipitously in recent months. If you’re not a stockholder, don’t worry.

  16. 16
    Leslie Panfil Says:

    The day WaMu sold our mortgage was the happiest day of my life! When WaMu made a mistake with our escrow it took is 8 months and 30 customer representatives to straighten it out.

  17. 17
    Tim Says:

    i think you can play wamu two ways: first, get the high cd rates. you are fdic insured and at this point if wamu goes under you will still have made higher interest rate and get your money+earnings to date returned by fdic. the more banks fail or if a major bank like citi or BAC goes under forget about getting fdic money at maximum deposits. second, buy more wamu.

    my estimation is that if wamu remains at or above $2, it is still viable. If wamu succeeds at remaining above $2 by the week’s end, i think it is healthy enough to weather on its own, although i would like to see someone buy it for $8/share with share value traded around $3 for stock swap to new owner stock. with what the analysis is saying, wamu should have tanked a while ago, yet it is resilient. i think s&p’s assessment that it remains capitalized is a good indicator although they have been downgraded to junk. not worried about being junk status. i remember in the 80s junk status was the bomb (ooh, does anyone say it’s the bomb anymore?).

  18. 18
    Maureen Gruchalla Says:

    We have a WAMU home equity loan, variable. If the bank is taken over by the feds or sold, would the interest rate rise? Our contract is prime plus a percentage. What happens to Prime with all this banking mess?

  19. 19
    Joseph Says:

    I have $40,000 in a CD and $25,000 in Money Market fund with Wa-Mu. The manager told me that I had nothing to be afraid of, because they were both FDIC insured up to a $100,000. In view of what happened to the market, are they wright that I have nothing to worry about?

  20. 20
    iQuack Says:

    Joseph,

    I think that your CD and money market account will be transferred to JPMorgan Chase and you’ll be their customer now.

    No problem, but I’d guess that if your CD is paying a high interest rate because WaMu had to pay more to attract deposits, the rate will be less from JPMorgan.

    I don’t think you have anything to worry about at all. As for WaMu shareholders, WHOO HOO–BOO HOO!

  21. 21
    iQuack Says:

    Joseph,

    I should have said that your CD would probably pay less interest after it matures and is renewed at JPMorgan.

    The money market fund pays variable rates, so watch to see the extent of any changes. But your deposits are safe now–much safer at JPMorgan than at WaMu–that’s for sure!

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