Money WaMu By The Numbers
posted by September 14 at 23:06 PMon
Lehman Brothers just imploded; this happened a bit sooner than most expected:
Lehman Brothers Holdings Inc. (“LBHI”) announced today that it intends to file a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. None of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings, LLC, may continue to trade or take other actions with respect to their accounts.
Lehman Brothers was founded in 1850. Not 1950. 1850. Lehman Brothers survived the Great Depression, only to be brought down by this crisis. Things are about to get very ugly.
We don’t feel it yet, but we’ll start feeling it shortly. How? One of the big financial institution expected to fail next is… Washington Mutual.
I have a checking account at WaMu. You probably do too. Washington Mutual is the largest Savings and Loan in the country—with more depositors than any other. If, or when, WaMu fails, a sizable chunk of the US population will be affected.
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.
So, when we go to an ATM, or write a check, Washington Mutual has to get that money somewhere. They can borrow it, but WaMu’s bond rating was just cut to one step above junk status—making it much more difficult and expensive to borrow. WaMu could sell stock, but the stock is already near worthless. WaMu could also sell itself—all of us as customers, all those ATM machines and branches—to make up the difference. Regulators begged them to sell in March. They refused. Nobody is willing to buy them for now.
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.
And that will be ugly, and potentially lengthy. This is a good time to start keeping good records—save those paper statements, or print out the online ones—to be sure you can prove what you’re owed.
Of course, if all of us start pulling our money out now, Washington Mutual will just collapse sooner. And we (necessarily) are doing some guesswork here, trying to determine what WaMu’s assets are really worth. So, I’m taking out a little cushion—in case the worst does happen—and keeping the rest at WaMu for now.
Not everyone has that luxury. If a month’s costs equal about the amount you have deposited—if you cannot wait a few weeks to get your money back—it might be worth moving your checking account somewhere else, just to avoid delays in accessing your money. Remember, by doing so, you’re possible hastening the collapse of a major bank.