Monday, September 15, 2008

Washington Mutual, Wachovia: Are Your Bank Deposits Safe? Not Exactly (WB; WM)

UPDATE: We have many, many posts on WaMu. Use the 'Search Blog' box keywords "Washington Mutual" for the list.
Original Post:
When I first came to the market I met a man who watched the near failures of Goodbody and F.I. duPont, Glore, Forgan in the early '70's. This was about the time that the Securities Investor protection Corp. was authorized. He told me that at first he assumed all would be well for retail investors. During the '73-'74 bear market he changed his mind and would only deal with the strongest firms.

What changed his mind? He realized that if a firm were to fail, it would probably be during a period of financial distress. This is precisely the time you want maximum flexibility and although the guarantee was probably good, if there were any glitches in the liquidation or transfer of his account that HE would be the one bearing the risk. He decided to only do business with the soundest firms, even if it cost him extra fees or commissions. He summed it up by saying "You never want to call the firm and have the receptionist answer 'Hello, SIPC'''

In an August '07 post "Liquidity in Business and Markets" and repeated in a Jan. '08 post "I'm Pissed at Merrill and Citigroup" I touched on the story of the insolvency of Krupp, at the time the largest industrial concern in Germany:
'Liquidity is expensive but illiquidity is much more so, because it destroys the very existence of a firm"

I don't remember if it was Johannes or Ernst, it was a long time ago that I read Manchester, quoting one of the Schroeder boys on the insolvency of Krupp. That line has stuck with me. Here's the book.
This has gotten to be a long introduction, on to the links. From ClusterStock:
Yes, your bank deposits are insured up to $100,000. But the Federal Deposit Insurance Corporation is rapidly running out of money, and if Congress doesn't refill its coffers, it won't be able to handle all the bank bankruptcies, says economist Nouriel Roubini (please see video below). Also, the insurance only goes to $100,000 per account, so if you're richer than that, better spread the money around....MORE, including video of a really smart economist (or below).
From SLOG:
WaMu By The Numbers

Let’s talk numbers: WaMu has about $180 billion in deposits—your and my money in savings accounts.

WaMu—like any bank—did something with this money. Most banks put about half of the money into mortgages (directly or indirectly though investments backed by blended-together mortgages, called mortgage-backed securities.) At Washington Mutual, more like 75% of assets were placed into mortgages.

So, take our $180 billion in deposits, and add in other sources of cash and Washington Mutual had about $300 billion to invest. About $225 billion dollars tied up in mortgage investments. They were supposed to be very safe investments. They weren’t....

...Well, what are those mortgage investments worth? Nobody really knows. Since so little information about the borrowers was collected for so many of these loans, nobody can really determine their worth. (The more information you’ve collected about the borrowers—their jobs, their income, their payment history, their savings—the easier it is to build a mathematical model predicting their chance of paying a loan of a given size.) The people watching the payments come in have a slightly better idea that the public, or a potential investor. In a nutshell, that is the subprime mortgage crisis.

We can try to make a guess. When Merrill Lynch sold somewhat similar mortgage backed securities in July of this year, they only fetched about twenty cents on a dollar. Now, this mix of investments in mortgages is different—and potentially worse—than WaMu’s, this was also months ago, when the market tended to value mortgage-backed securities more. If we take this as a reasonable guess (and it only a guess!) of the market value for WaMu’s holdings, that $225 Billion (of our money) WaMu invested is only worth about $50 billion right now. Analysts are digging through WaMu’s stock of mortgage investments, trying to figure this out.

WaMu still owes all of us that $180 billion. Even assuming that all of the other, non-mortgage assets are still worth every penny invested—WaMu only has about $125 billion-worth ($50 billion that we guess the mortgage-backed stuff is now worth, plus $75 billion of the rest) of assets to pay us back that $180 billion....

...If this all catches up to Washington Mutual, and they collapse entirely, our deposits are insured by the FDIC—up to $100,000 per account. The problem is, with $180 billion in deposits to cover with questionable assets, it’s not clear the FDIC has that kind of cash around.

The FDIC has about $50 billion in reserves right now. Using my rough estimates, $180 billion less $125 in assets, the bailout of our accounts at WaMu will probably make the FDIC itself insolvent. It’ll probably take taxpayer-funded bailout of the FDIC to pay back all our savings....

From Self-evident:

How big is WaMu?

The largest bank failure in U.S. history was Continental Illinois National Bank and Trust Company. When it failed in May 1984, it had $41 billion in assets and $30 billion in total deposits.

According to the FDIC press release, when IndyMac failed in July it had $32 billion in assets and $19 billion in deposits, making it the second-largest failure in history.

Washington Mutual has $310 billion in assets and $182 billion in deposits. (Their market cap is now below $4 billion.) So think of WaMu as 10 IndyMacs.

The FDIC estimates the IndyMac failure will cost their insurance fund $9 billion. The total size of the fund is now $45 billion, its lowest since 1995. When the fund runs out… Well, I am not sure what happens, exactly. Presumably FDIC taps the Treasury, meaning the taxpayer, meaning you. (Actually, Treasury borrows the money from China and Russia and the petro-states. It all depends on how you look at it.) Anyway, I am not sure what the mechanism for replenishing the fund would be… I’ll get back to you.

So you tell me. You didn't mismanage WaMu into the ground. I certainly didn't. I just don't want to see one of these: