Tuesday, May 26, 2009

It’s worth remembering that these are the only two US financial institutions where senior lenders took a haircut

From Reuters:

Felix Salmon

is summer arriving?

May 26th, 2009

Revisiting WaMu

Posted by: Felix Salmon
Tags: banking, regulation

JP Morgan, having lopped $29.4 billion off the value of WaMu’s loans when it took over the troubled lender, now reckons it’s going to get the lion’s share of that money back:

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

WaMu failed in the middle of the sleepless craziness following the Lehman collapse, and in hindsight might well have been at least as much of a factor in the scary gapping-out of Libor as Lehman was. It’s worth remembering that these are the only two US financial institutions where senior lenders took a haircut — and in both cases the senior lenders were pretty much wiped out. In other bank failures, even the junior lenders generally emerged unscathed.

It increasingly seems as though a panicked FDIC thrust WaMu into the arms of Jamie Dimon, who could — and did — ask for pretty much anything he liked, including the right not to have to pay back any of WaMu’s creditors. The result was that the bank wholesale-funding market went straight into crisis: one sui generis default (Lehman) might have been navigable, but when you have two in as many weeks, it’s pretty clear which way the wind is blowing.

We’ve had endless rehashings of the weekends leading to the Bear Stearns and Lehman Brothers failures, but I’ve seen much less on the subject of WaMu, which is equally if not more fascinating and just as systemically important. The news out of JP Morgan that it massively undervalued WaMu’s loan books certainly seems to indicate that the likes of John Hempton have a point when they say that Sheila Bair got this particular decision spectacularly wrong, and in doing so put the entire US retail banking system on a much more fragile footing than was necessary.

Bair also took a relatively consumer-friendly bank (WaMu) and forced it to adopt the practices of a relatively consumer-unfriendly bank (Chase) — with predictable results: Chase is now telling former WaMu customers that even if they have directed the bank not to let their accounts go overdrawn, the bank can still push the account into overdrawn territory anyway, and, of course, “will assess an Insufficient Funds Fee” for doing so.

It’s clear that the big winner here is JP Morgan, but the rest of us — taxpayers, WaMu account holders, WaMu creditors — increasingly look like very big losers."


I agree that the WaMu seizure and sale was a mistake, but I think that it follows from Lehman. Now being quite aware that mergers were the only option for large banks and financial entities, they didn’t want to wait and chance a Lehman like situation, where the B of A and Barclays deals didn’t work out. So, they proactively seized and merged, scaring the hell out of bondholders and creditors.

Oddly, Lehman had scared investors that the government wasn’t guaranteeing the unwind. Now, WaMu scared investors that, even if the government got involved, they were in for a hellish ride of possible losses.

Of course, if you believe as I do, that the government needed to guarantee everything right off, like Geithner, then both of these actions are terrible mistakes.However, in both cases, Lehman and WaMu, I can understand why the government acted as it did. Too bad that’s not going to stop them from looking like idiots in the history books, because a good plot needs dunces by which to measure the ultimate heroes intellect.

- Posted by Don the libertarian Democrat

No comments: