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WaMu: Shareholders Run; Depositors Told to Stay and Take Responsibility

Over on my posts on Washington Mutual’s financial position, I’ve had more than a few commenters taking me to task for being “irresponsible” or for supposedly encouraging a run on WaMu.

Let me tell you something: A run has already occurred on WaMu. The shareholders and bondholders have already left the party, leaving the depositors, the FDIC and ultimately the taxpayers to clean up the mess.

Don’t take my word for it, take the freaking Wall Street Journal’s, that bastion of socialistic, pro-New Deal, thought:

For the first time in more than 70 years, a psychological “contagion” is threatening to drive financial concerns out of business, but this time American International Group Inc., Washington Mutual Inc. and others are facing a shareholder run.

….this time, it’s shareholders who are responding as the bank depositors did in the 1930s. In a vicious cycle, fears about firms’ capital position is weighing on shares, and the decline of the shares’ value is making it difficult to raise capital.

Don’t panic depositors, we’ve been told:

“It’s going to be ugly out there today and over the next several weeks, but when in doubt, repeat after me; ‘$50 billion dollars!’ “

The WaMu executive was referring to the bank’s statement last week that it has more than $50 billion in available liquidity to pay depositors and make loans.

Well, from where is this “$50 billion in available liquidity”? Us, the depositors.

Via the Financial Times:

“This week and next will be the moment of truth for WaMu,” said Fred Cannon, an analyst at Keefe Bruyette & Woods. “Their primary sources of liquidity are retail deposits and advances from the Federal Home Loan Banks [FHLB] but, now they are junk-rated, WaMu may have to pay more to encourage depositors.”

Got it? WaMu desperately needs to both keep existing checking accounts, and even attract new ones at a long-term loss, in order to stay solvent. The bond holders and the share holders have given up on the bank.

Yes, the depositors are protected by the FDIC guarantee, protecting the first $100,000 in a savings or checking account or $250,000 for an IRA (per person). For those of us already at WaMu, this might be enough to keep us around. Just know there might be a few days, or even weeks, of turmoil before you get your money back. A failure of Washington Mutual might cause the FDIC itself to require a bailout by the Federal Government. Try to have a cushion of money somewhere else, at least.

If depositors start leaving, that leaves the FHLB as the solitary source of funding for WaMu. Loans from the FHLB are low-cost, but not-zero cost. Financing that FHLB debt costs.

To pay those financing charges, if new depositors stop coming and the old start leaving, WaMu has no resources to draw upon right now—beyond a fire sale of the nearly quarter-trillion dollars it’s holding in mortgage-backed securities.

So, yes, our deposits are protected—by us, the taxpayers. And if we calmly stay—do the responsible thing and not try to personally profit off of a dangerous situation—WaMu will continue to exist for a while—until it ultimately collapses in a few years, it is sold (perhaps with the Federal government as a midwife) or it regains the confidence of the stock or bond markets.

But, let’s not confuse who made a run here
. All you assholes boasting about the killing you made with SKF? Thanks for bringing us ever closer to total financial collapse. Asking that we be patient, responsible and wait with our insured deposits (insured with our own tax dollars) while you finish raiding from the top? Priceless.

Comments (38)

1

So.... Is the seattle area ready to absorb the 4500 employees who'll be out of a job? Please? database developer lf job...

Posted by damnit | September 16, 2008 6:38 PM
2

Let's make April 17 "Run on your bank Day!". Let's get every American to pull all their money out of their accounts and watch what happens!!!

Who's with me?

Posted by Cato the Younger Younger | September 16, 2008 6:39 PM
3

How do you blame short sellers for the current woes? They wouldn't be cashing in if the company wasn't being driven into the ground. How about blaming the management that decided to put nearly a quarter-trillion dollars into mortgage-backed securities?

Posted by tsm | September 16, 2008 6:46 PM
4

One of the best things to do - and keep jobs here - is to pull your money out of your WaMu account and deposit it in a local credit union.

Net job loss ... nil.

Posted by Will in Seattle | September 16, 2008 6:54 PM
5

@4, except, of course, WaMu is a national chain.

Posted by good analysis Will | September 16, 2008 7:02 PM
6


The Fed interest rate is 2 percent.

Why are home mortgages 6 percent?

If Wamu wants income, let them cut their rate for loans to 4 percent and pay interest at 3 percent like they are now.

It's called supply and demand.

Wamu should learn to be like an old time SLA -- savings at 3 percent, loans at 4 percent and pocket the difference.

Back to the Future!

Posted by John Bailo | September 16, 2008 7:04 PM
7

Golob, this doesn't change the basic fact that you're (tacitly now, but still...) advocating a run by depositors on WaMu. No bank has enough assets to pay off everyone who has a deposit with the bank. It's a system built on, ultimately, faith and trust (including faith in the FDIC, and even if that happens my understanding is that another bank takes over your accounts), not your hard dollar evaluation of assets and liabilities. I'm glad you're evaluating and reporting, but keep the big picture in mind, including your role in it, no matter how much you'd like to hide from it.

Posted by Wrongo | September 16, 2008 7:08 PM
8

Personally, I wasn't accusing you of trying to encourage a run against WAMU, I just thought the housing crisis was due mostly to sub-prime lending, which WAMU only had 17 billion or so in. Therefore I haven't heard a really solid explination as to where the rest of their money has gone.

Posted by CP | September 16, 2008 7:13 PM
9

Ok John Bailo:

I'll do the math for you.

Let's say, with wild over-optimism, that the $225 bn invested in shitty mortgages is still worth $200 bn (or 90% of the starting value).

So, you want WaMu to make up that $25 bn by investing ALL of the $50 bn it has in liquid resources in "loans to 4 percent and pay interest at 3 percent" scenario, with a spread of 1%?

T = Ln(A/P)/R = Ln(75/50)/0.01 = 40.5 years.

Wait, why am I even bothering with the troll?

Posted by Jonathan Golob | September 16, 2008 7:20 PM
10

Re: SKF, DXD, DUG, REW, QID, SDS, SRS, SIJ and all of the other Ultrashorts, what do you expect? I actually think these are lesser evils, since they give your average investor access to short selling, and allow little guys to take advantage of shitstorms. So, yeah, someone who bought DXD on Friday made nearly 10% yesterday, but at least the option is now there. Before, you needed to be approved for options, needed to have enough cash to buy round lots of stocks, and to cover the cost of a put. If you know a sector is fucked, you might as well profit, and that profit might as well be spread among the masses.

If you want to stop the runs, reinstate the uptick rule, forbid naked shorting, and put a Marxist economist in charge of monitoring Moody's. If those fuckers hadn't been getting paid off in the '90s, we wouldn't be in this fucking mess today.

Posted by Gitai | September 16, 2008 7:21 PM
11

@9 That doesn't make sense. The Federal funds rate is just the rate at which the Fed lends money to banks that need to meet their minimal capitalization. Mortgage rates are entirely independent. And besides, the damn things have to get paid back before the bank makes money, which is the whole damn problem in the first place.

Posted by Gitai | September 16, 2008 7:26 PM
12

Gitai--

I'll ask Charles if he's too busy to run Moody's.

And to Gitai and tsm: The short sellers are the latest in a long line of fuckers, in my mind. The line starts with the (now former) management team at WaMu, who indeed, shoved so much into such shoddy places. Ultimately, I'd like to see Greenspan over a dunk-tank filled with sharks for both this AND the S&L crisis of the 1980s.

Wrongo: I did agonize over this. I'm not telling anyone to do anything, beyond be aware of the situation. Why do you want to keep people ignorant.

Cp: I know enough about linear models to know it's very difficult to figure out what that $225 bn is really worth now. Isn't that the crux of our present nightmare.

Why didn't they just collect the damn data--the employment, savings and other points by which a model could be crafted? These fucking liars loans have to be the most irresponsible thing done in centuries of finance.

Posted by Jonathan Golob | September 16, 2008 7:27 PM
13

Gitai @11: Sorry, that was the point I was trying to make. His overblown scenario is nuts. Serves me right for feeding a troll--it made me stupid.

I'm editing my comment to leave only the last calculation.

Posted by Jonathan Golob | September 16, 2008 7:30 PM
14

@12:
I don't want to keep people ignorant. But I think your analysis disregards the basic point that you yourself put forth, without returning to, in the original post: "If this all catches up to Washington Mutual." The ONLY thing that would do that is a run. By depositors. I've said I appreciate your reporting, but it's the asides and "advice" that are irresponsible, and your defensiveness about them should be a telling sign to you.

Posted by Wrongo | September 16, 2008 7:32 PM
15

On today's KUOW call-in show "The Conversation", the topic was finance. A bunch of callers called in asking the Motley Fool guy and some Newsweek lady if they should withdraw their deposits from WaMu. Both of them, while hedging slightly, basicly said yes. The run, already long ago started in California when the media mentioned WaMu in the same breath as IndyMac, is inevitable. Get your money out, and invest in metals.

Posted by pa | September 16, 2008 7:40 PM
16

Blaming SKF purchasers for the current problem is like claiming the Seahawks lost because too many people bet on their opponent.

Posted by bob | September 16, 2008 7:48 PM
17

@16:
No, it's not. As Jonathan has ably pointed out, crappy stock prices and bond ratings impact WaMu's ability to raise capital to cover short-term obligations. It doesn't cause a run, as JG mistakenly says, but it sure makes them more vulnerable should people get antsy.

Posted by Wrongo | September 16, 2008 7:53 PM
18

Shorts don't cause crappy stock prices, they simply benefit from them. I do think there should be additional regulation on shorting, readopting the uptick rule for example.

But shorts are not the problem, the problem is mortgage fraud, sloppy (non-existent) underwriting standards, allowing companies to sell derivatives that can't be accurately priced (by anyone), and finally, "deregulating" an industry when the government really has no intention of allowing these companies to fail.

Posted by bob | September 16, 2008 8:05 PM
19

@18:
You really don't think that the existence of funds like SKF add to volatility, in this case an over-responsiveness to the undercapitalization at issue here?

Posted by Wrongo | September 16, 2008 8:14 PM
20

Perhaps. It's hard to say because stocks that are in trouble or risky are already inherently volatile. I think there should be some reforms - reinstating the uptick rule and getting tougher on naked shorting.

Honestly I think that 90% of the sentiment against shorting is simply gut-level reaction that benefiting from the problems of others is bad.

Btw, I've never take a short position in my life, anything with limited upside and unlimited downside is too risky for my taste.

Posted by bob | September 16, 2008 8:45 PM
21

You know, I want to believe in justice and forgiveness and all that good stuff, but situations like this really make me want to put a bullet in the head of every big financial executive who escaped the current crisis with a golden parachute. I want revenge against people who seem entirely too good at escaping justice.

Posted by Greg | September 16, 2008 9:22 PM
22

What does "shareholders run" even mean? Consolidation? Because whenever a share is sold a share is bought.

Posted by daniel | September 16, 2008 9:50 PM
23

What's the involvement of the new WaMu/Seattle Art Museum building, with the goiter and the special dispensations?

Posted by Amelia | September 16, 2008 9:50 PM
24

Hey wait a minute. This WaMu is the LOCAL bank -- run by folks just like us from right here in Seattle. They're like galloping grannies or something. WaMU isn't a big bad national chain.

So all this angst is misplaced. They have local values. Shop local! Stay away from national baddies like BoA!!

Posted by PC | September 16, 2008 9:55 PM
25

The ironic thing is that if more prudent people had been running these banks over the past, say, five years, more than likely they would have been fired for not being aggressive enough while all their competitors raked in the dough.

Sure, they would have been able to say "told you so," but they would have been out of a job years ago.

Posted by bob | September 16, 2008 10:25 PM
26

@25, execs have said as much at corporate.

Posted by righto | September 16, 2008 10:38 PM
27

The gov't is rescuing AIG. I think there's a parental analogy about not following through on threats of punishment that might be useful here. Kids, and big financial institutions, soon learn not to take you seriously. Sorry, Lehman, the middle child always gets screwed.

@22 And every time a bell rings, an angel gets his wings. (I know, I've beaten the horse to death by now.)

Posted by PopTart | September 16, 2008 11:17 PM
28

I took $200 out of my Wamu checking last night and said "whoo-hoo!" Because I'm one of those living paycheck to paycheck people, and fuck anyone who says I should leave all my money in a bank that has been looking iffy for months. I'll leave some money there, but not all of it.

I think the people who got screwed the most were Wamu employees who had a lot of Wamu stock in their 401(k)s.

Posted by asteria | September 17, 2008 12:28 AM
29

I put my paycheck into WaMu yesterday, and am not terribly worried about their current situation as it affects my liquidity.

Oddly enough, though, I did get a call from a business banker regarding an account I'm a signer on asking if there was anything they could do for us, so it sounds like they are worried about a run of some sorts.

My dad lost money because he owned stock, but one of my bandmates picked up 300 shares at $2 each today, and I bet he'll see a handsome return in the mid to long term on that.

Of course, we could be wrong. But I think the level of panic is overstated. WaMu will get some sort of federal bailout if necessary - if only because no elected official relishes the idea of the FDIC having to pay out to the number of people who would be affected by WAMU totally collapsing. I think that's probably still going to be true even after the election, let alone before it.

And if not, I've still got my lousy BOA (formerly Seafirst, sob) account and enough to live on until the FDIC gets me my money back.


Posted by Mr. X | September 17, 2008 1:00 AM
30

I moved most of my $ out of my local WAMU (L.A. area) in early August, when their stock dropped below $4. (And, alas, some $ had to remain w/ them for the moment because moving an IRA prior to its renewal date is more touchy than closing CD accounts & finding a new bank. I hope WAMU can hang on until November.) The folks @ Washington Mutual clawed and scratched every minute to persuade me not to take out as much $ as I could, and handed out a broadsheet advertising their supreme fiduciary healthiness in order to unsuccessfully dissuade me. WAMU sounds like the name of some killer whale in a marine theme park.

Posted by E | September 17, 2008 7:15 AM
31

keep in mind that shorting still follows the "buy low, sell high" mantra. And something like 2% of the market's shares are in a short position at any given time.

Posted by happy renter | September 17, 2008 8:57 AM
32

Golob, a bank run would help people shorting or owning SKF even more. Hell, when any bank fails or is bailed out I'm making 10-15% off of it with SKF.

And you should brush up on how short sales affect the price of shares and how SKF works before you blame us for riding the wave. Theres an old saying; "The trend is your friend until it bends in the end."

Posted by Bellevue Ave | September 17, 2008 9:11 AM
33

and take note; UYG the reciprocal to SKF is at almost $16 a share, down 20% today. you saw yesterday how it went up...it might be smart to buy some when it drops below 12-14.

Posted by Bellevue Ave | September 17, 2008 9:32 AM
34

re: short selling

In the Wisdom of Crowds, James Surowiecki talks about how short selling actually contributes to the stability of the market, not its undermine. I'm can't remember the details of the statistics that backed that up, but I'm sure they'd be easy to find.

Posted by nicole | September 17, 2008 10:32 AM
35

imagine a world where people can't short sell. The seller would have to keep lowering the price of an obviously risky company until someone is willing to buy the shares. The With short selling in place the short sellers are providing stops along the way where buyers can unload their shares. This is easily summed up in one word; liquidity.

theres also money made in heavily desired shares for shorting. Brokers can charge interest on the shares borrowed before they are delivered. Then you can recieve that interest payment from the broker.

Posted by Bellevue Ave | September 17, 2008 10:56 AM
36

Golob-

I'm afraid you're confusing the entire issue:

First, shorting an individual stock is different than buying SKF or other inverse ETFs. Buying SKF has no direct effect on the stock prices of banks because SKF is priced based upon the underlying net asset value of a basket of derivatives that rise and fall at twice the inverse of the corresponding "long" financial ETF fund (name is escaping me).

Second, shorting a stock does not drive the price of the stock down on its own. If I short a stock, I borrow the shares from the broker until that time when I cover the position and "buy" the stock at the lower price. Its the sale of long positions that drives stock prices down, and conversely, the covering of shot positions that helps drive prices up once they have been depressed. Without longs bailing out, shorts can't make any money.

Finally, shorts, like longs, serve a a value by contributing liquidity to the system, which helps contribute to healthy market. In the current situation, shorts are just helping to expose the fact that most banks and not presently solvent and driving the banks to a fair market price, which in many cases is zero.

Posted by Flotown | September 17, 2008 11:01 AM
37

I just spoke to someone who said she's taking all her money out of wamu and closing her accounts.

Think the run has begun

Posted by Friar | September 17, 2008 4:27 PM
38

I do not have any funds or investments in WaMu. Several years ago, I refinanced my home through them based upon positive comments about the company. Prior to closing, I specifically asked that the closing occur at a local title company. WaMu had someone not working for them but designated a Limited Practice Officer conduct a very nervous closing. After closing, WaMu failed to make payment to my mortgage life insurance company after requesting this to be done via letter and subsequently diverted my escrow account to the principle without informing me. I nearly lost the mortgage life insurance after nearly 13 years of payments, and had to transfer funds into my escrow balance. Several letters to WaMu management failed to provide reasons for their lack of professionalism. I do not feel sorry for the company one bit in their present situation. The CEO and management personnel should be held accountable and not given golden parachutes.

Posted by Angry Homeowner | September 21, 2008 9:56 PM

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