Liquidity Crises Fact -- WaMu failure the result of the largest bank run in world history

[grantcart]

This is not a thread about solutions to the liquidity crises.

However in trying to explain what a liquidity freeze is and what impact that would have many have doubted that any real liquidity crises exists.

I do not know for a fact that a liquidity crises exists but on Friday while we were concentrating on the debates Washington Mutual was taken over by the FDIC and all of the shareholders of the largest retail bank in the US lost all of their investment.

The reason is not because of their debt service but because depositers took out money. Here are the facts:

Washington Mutual Largest Bank Run in History Depositers withdraw $ 16,700,000,000 in 9 days.

http://www.utvi.com/news/latest-business-news-us/11011/fleeing-depositers-sent-wamu-crashing-.html

WASHINGTON: As depositors lost confidence in Washington Mutual Inc, and began emptying their accounts, regulators abandoned hopes of saving the largest US savings bank and conducted a secret auction.

"It was a full-time effort the last several weeks to do everything possible to keep the institution alive," said Washington Mutual's regulator on Friday, a day after it was seized then sold in the biggest US bank failure ever.

Office of Thrift Supervision Director John Reich told reporters that the bank's liquidity was being monitored daily.

But in a span of nine days leading up to its failure, customers withdrew about $16.7 billion in deposits forcing US officials to sell Washington Mutual out of receivership for just $1.9 billion to JPMorgan Chase & Co.

It was a sad end for the 119-year-old institution headquartered in Seattle but ended well for regulators and the public, costing nothing to the US fund that insures most bank accounts up to $100,000.

Washington Mutual had been one of the lenders hardest hit by the US housing bust and credit crisis, and had suffered from soaring mortgage losses.

In February its regulatory rating slipped to a 3 from a 2 on a scale that goes down to 5. That was not enough to place it on the Federal Deposit Insurance Corp's troubled bank list, but it was a portent of things to come.

On September 18, WaMu's rating slipped to a 4 and it was placed on the FDIC's watch list, a fact kept secret at the time to prevent a self-fulfilling run on the bank. A 4 rating reflects financial, operational or managerial weaknesses that threaten a bank's financial viability.

But in hindsight, the time for a private sale had come and gone. By September 24, WaMu's deposits had plunged 33 percent to $129 billion from $188 billion at the end of June.

FDIC Chairman Sheila Bair told reporters on Thursday that after an open process to find a buyer failed, the agency turned to its secretive auction process in which bidders place their offers on a secured website.

This is the same type of bank run that our parents and grandparents lived through and that is imortalized in the movie, "Its a Wonderful Life",

[FreakinDJ]

1. And the FED handed JP Morgan a REALLY GOOD Deal

Who promptly turned around and screwed the investors

[grantcart]

2. your facts are inaccurate

If you hit the link you can read the article in its entirety


1) the FDIC took the bank and its assets from the shareholders. There was no involvement between JP Morgan and WaMu investors. JP Morgan purchased the bank from the FDIC by a bidding process.

2) there was an auction and JP Morgan won the auction:

Four banks submitted their plans by the Wednesday due date, and the same day JPMorgan was notified it had won. The FDIC declined to name the other participating banks.

At that point FDIC was trying to get the best deal not for WaMu shareholders but for the FDIC and indirectly taxpayers.

[endthewar]

24. "secret auction"

I agree with you, but I think this is the term that some people might find troubling. It just sounds bad and smells of corruption.

[Cronus Protagonist]

3. So the bank allegedly had $129 billion in deposits and a run on only $16 destroyed the bank?

Reading between the lines, clearly it wasn't the run that killed them, it was the BAD LOANS they had on file, forcing the rating to fall. INEPT OR CORRUPT MANAGEMENT caused the failure, not good people trying to save themselves from the INEPT OR CORRUPT MANAGEMENT.

Sorry about the shouting, but I could not be bothered to use bold tags, but I did want to make sure the cause of the failure is clearly noted in the face of this banking propaganda.

[grantcart]

4. The bank had lost 33% of its depositors or $ 59 Billion since June

$ 16 billion lost in 9 days.


But in hindsight, the time for a private sale had come and gone. By September 24, WaMu's deposits had plunged 33 percent to $129 billion from $188 billion at the end of June.


The stated rationale by the FDIC was that it was the plummeting level of depositors, $ 59 billion in about 100 days that triggered their loss on rating from a 2 to a 5. It was highly accelerated during the last 9 days.

While WaMu obviously has a lot of bad debt they were servicing that debt and it was the loss of depositor confidence that caused the FDIC action.

edited to correct subject

[DBoon]

5. Republicans have always wanted to dismantle the New Deal

they suceeded and now we are back to 1920's style bank runs

[bobd0]

6. I have only a few bucks in WAMU

savings and checking accounts. I only started them last year because WAMU invited me to start free checking and savings. I used the checking account for eBay/PayPal transactions so I didn't have to expose my main accounts at my other bank to those transactions, so I left my few bucks in WAMU for future use in that regard.

However, I went to my main bank this week to open CD's with the proceeds of an annuity we emptied last week when it looked like the country was just a day or two away from a complete financial meltdown. Annuities are NOT FDIC INSURED. I lost a few bucks ending the annuity a few months early but the CD's we started are insured and the annuity hadn't made any gains in the last year anyway.

One fact people sometimes ignore is; when the entire US financial system goes belly up the rest of the world will follow and then even those insured funds are worth far less than they are in a healthy economy. Deflation, hyperinflation, I'm no economist but these are not good things from what I've read.

Just like the Great Depression, this crisis was caused by RIDICULOUS REPUBLICAN FISCAL POLICIES and the unbelievable greed of the few who benefit from those policies. I grew up listening to stories of The Great Depression from my mother and many older family members and friends who lived through it and, believe me, this world does NOT want to live through another Great Depression. I'm so against bailing these greedy bastards out but the consequences of not bailing them out are worse so I'm holding my nose and supporting the bailout BUT NOT THE BLANK CHECK BAILOUT PAULSON/BUSH PROPOSED AND NOT THE EVEN MORE RIDICULOUS REPUBLICAN PLAN TO CUT CAPITAL GAINS TAXES ON THE SAME GREEDY RICH BASTARDS WHO CAUSED THIS FIASCO!

I thank God than we have leaders like Obama/Biden at this point in history who are mindful of the effects on the average American and are working to include at least some safeguards for us in the bailout plan. That is the only saving grace of this horrible situation -- that we may achieve some modest aid or gain for the average Americans who are facing their worst economic crisis in eighty years under an administration whose only goal and only plan is to provide even more financial aid to those who have more money and resources than they could ever need or use. AND THAT IS JOHN SIDNEY MCCAIN III PLAN TOO. THAT IDIOT BACKS BUSH'S FISCAL POLICIES 100%!

This, along with an immoral, unnecessary, unprovoked attack against the people of Iraq, the subversion of our Constitution and shredding of our Bill of Rights, approving torture as the policy of the USA, as well as incompetence and corruption at positively criminal levels, just to name a few, are the true legacy of those motherfuckers Bush and Cheney. Yet Pelosi refuses to even attempt to bring them to the justice that they so dearly deserve.

May they rot in hell along with everyone who worked for and with them in this dreadful administration, and everyone who was in a position to speak up but instead remained silent, and everyone -- YOU NANCY PELOSI PARTICULARLY -- who had the power to do something but refused to exercise it.

I'm no angel and I very well might rot in hell for my sins too but, if so, all I ask is that I have a clear view of these bastards rotting along with me. That alone would make eternity in hell so much easier to bear.

[depakid]

7. WAMU expanded recklessly and became a predatory lender

- even purchasing the very WORST credit card company- Providian- and relying on abusive fees for tens of millions in cash flow.

The run at the end was as much the result of years of declining customer service (loss of good will) as it was the fear of losing insured deposits.

[grantcart]

9. yes that is correct it was 180 degree change after years of very careful loan managment

[depakid]

13. The customer service orientation changed right alongside the expansion

One of their scams was written up in Alternet last year:

Young Adults Are Getting Hit with Enormous Overdraft Fees

More and more consumers -- particularly young adults -- are finding the deck stacked against them when it comes to battling abusive overdraft fees. Banks and credit unions now routinely allow most debit card transactions to go through when their account holders have a negative balance. Instead of declining the transaction, institutions will advance the funds to cover the shortfall (often less than $20) and charge the account holder an average fee of $34 for each overdraft.

Consumers are not given an adequate chance to prevent these fees, which are largely out of proportion to the loans themselves. In fact, adults in general pay about $2 for every dollar the bank advances to cover debit card overdrafts, while young adults pay $3.25 for every dollar loaned to them, due in large part to their frequent use of debit cards for low dollar transactions.

More: http://www.alternet.org/workplace/66749/young_adults_are_getting_hit_with_enormous_overdraft_fees/

I've heard of dozens of people who've been tagged on this- in some instances, they had savings accounts that money could have been drawn from- indeed, there's a provision for doing this when accounts are opened- but it's OPT IN. The default position is to nail customers $35 per Point to Point transaction!

I also have a good friend who had a documented identity theft case, and it was like pulling teeth to get WAMU's assistance to straighten out the problems and get them to live up to their obligations.

Needless to say, when all was said and done- he closed his accounts.

These sorts of deals just sap a company's good will- and the Washington Mutual of, say the mid 1990's would not have behaved like that (which is part of the reason they became so successful).

[msallied]

21. OMG!

You know, I WONDERED about that! I am a WaMu customer and have gone backward on my balance more than once and was SHOCKED at how far they'll let you go before they start blocking transactions! I have been the customer of several banks and they are the only ones who would put forward the balance due this way and charge an overdraft fee instead of just declining the transaction when there wasn't money to cover it. They literally ENABLE people to live beyond their means this way while getting rich off of it!

It's disgusting.

[Raineyb]

23. Something like that happened to me too

I got hit with a overdraft fee when I somehow managed to schedule a transfer twice thinking that the transfer request didn't go through. They hit me for 30 something bucks for the error. After I called them to tell them about the error in the first place.

Regards

[Dems to Win]

12. WAMU was good at gobbling up small banks, bad at serving it's customers. Good Riddance.

Several years ago, the company that held my mortgage was bought by WAMU. WAMU couldn't even arrange to forward the mail from the old bank's address to WAMU. Incompetence in the extreme. Such companies SHOULD fail.

So should the Wall Street companies currently looking for a handout from the taxpayers. It is truly immoral to privatize the profits and socialize the losses, as we're seeing happening. The bailout promises to reward predators while doing nothing for the victims. Disgusting.

[depakid]

14. errr.. Most of those at WAMU aren't being rewarded!

Depositers are being protected- shareholders and employees are losing. What happens to the CEO(s) remains to be seen. Somehow I doubt they're going to skate off into the distance with ill gotten gains.

[msallied]

22. I think I read yesterday that CEOs are getting massive severance packages.

Figures.

[depakid]

27. As I mentioned- let's just see how it plays out

My bet is that in changing times, they're marked men- easy marks, and will wish that they hadn't had the gall to attempt to pull that off.

[PerfectSage]

8. Yeah there was a liquidity crisis on Friday.

http://www.rgemonitor.com/index.php

On Sep 25, 3m USD LIBOR-OIS spread jumps to record 199bp. 3m EUR LIBOR-OIS at 86bp (record was 93bp in November). TED spread (3m LIBOR- T-bill) is a 316bp
Sep 24: LIBOR rates at or near record highs again in USD, EUR, GBP. UBS analyst: "There's no real term funding markets except for central banks. The Libor is meaningless. It's for unsecured lending and there is no unsecured lending as far as I can see.'' (Bloomberg)--> ECB auction of three-month loans was the strongest on record, while banks paid a record premium for dollar loans at Sep 23 Fed sale.
Sep 18: In coordination with other major central banks, the Federal Reserve made as much as $180 billion in financing available by expanding swap lending agreements with the European Central Bank, the Bank of Japan and other counterparties.
Fed will spray the dollars around the world via swap lines with other central banks who can then provide their respective commercial banks with short-term dollar funding
What prompted the move? Collapse of Lehman and AIG increased banks' reluctance to lend to one another, severely disrupting inter-bank USD lending
FOMC has authorized increases in existing swap lines with the ECB and the Swiss National Bank. These larger facilities will support the provision of U.S. dollar liquidity in amounts of up to $110 bn by the ECB (an increase of $55 bn), and up to $27 bn by the Swiss National Bank (an increase of $15 bn)
New swap facilities have also been authorized with the Bank of Japan, the Bank of England, and the Bank of Canada. These facilities will support U.S. dollar liquidity in amounts of up to $60 bn by the Bank of Japan, $40 bn by the Bank of England, and $10 bn by the Bank of Canada; all the swap lines expire on January 30, 2009

O'Neill of Goldman Sachs (via Bloomberg): There's a lot of cash hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act
Chris Turner of ING (via FT): These measures address funding difficulties, but do not address the primary risk of further bank writedowns and capital shortage.

Mutkin of Morgan Stanley (via Real Time Economics): If these measures don't re-open financing markets, the CBs have 2 more options: 1) moral suasion to encourage banks to lend to each other, spot and for term; 2) concerted rate cuts, which have become more concrete as a possibility since this concerted action. Expects CBs will be prepared to move forward very quickly if today’s actions don’t start working in pretty short order


LIQUIDITY CRISIS = DEMAND FOR SHORT TERM MONEY(BORROWING > SUPPLY OF SHORT TERM MONEY(LENDING)
END RESULT WILL BE A BOATLOAD OF BAD DEBTS EVENTUALLY WRITTEN OFF AS WORTHLESS.

[grantcart]

15. Interesting can you translate for us lay people?

[PerfectSage]

19. Because of all the recent bankruptcies, everyone is hoarding cash. No ones willing to lend

The demand for short term borrowing is so much greater than the supply of short term lending that the interest rate and libor spread is very high.

So every financial institution that needs to borrow money short term is paying a very high interest rate.

[regnaD kciN]

10. Thanks a lot, dipshits...!

Thanks to you not understanding the meaning of "FDIC insurance," those who stayed behind are now going to find themselves under the tender ministrations of Chase (the scum of the banking world), thousands of employees are going to lose their jobs, and charities and arts programs in the Pacific Northwest are going to get killed. (WaMu was a major funder, not only of the symphony, opera, ballet, and art museum, but also of lots of programs for the homeless. Now, of course, all that money will be going to Chase top management so they can buy even bigger summer homes in the Hamptons.)

:nuke:

[grantcart]

11. Good point and even those that had more than $ 100,000 were still covered.

[Starry Messenger]

17. Wow, I didn't know that about WaMu's community support.

I am a customer of theirs and left my money in because I do have confidence in the FDIC. I am very disappointed with the turn of events. I have a Chase visa and I've always hated them. I'm not happy they are now my bank now, too.

I am an artist and I know that kind of money is the absolute life blood of a thriving arts community. This makes me sick to think about.

[Raineyb]

20. Me neither

I also left my money in Wamu since I have less than $100,000 on deposit and knew I'd get my money back.

Now I have a new dilemma. I already have an account with Chase I don't need another. I need to find a new bank.

Regards

[sandnsea]

16. They were in serious trouble before the 'bank run'

That's important to remember. In addition, people weren't pulling their money, they were moving the excesses of the FDIC $100,000 amount. They didn't put it in their mattresses, it should still be in the overall liquidity mix.

And since JP Morgan bought them out, I don't think the WaMu shareholders lost their life savings, did they?

[BlooInBloo]

18. Or else it's the other-way-round.

:P

[endthewar]

25. Thanks to Bush's address calming the fears of the nation

His address was scary, plain and simple. No wonder there was a huge run on that bank.

[grantcart]

28. well in this case it was the other way around WaMu lost $ 50 billion before

Bush made his speech - It was the run that was scarring him.

[Medusa]

26. Will Wachovia be next?

The word is already out how they are shopping for a buyer/mergee to save their bacon. How long before their customers start pulling their money too?

[Abugface]

30. I maxed out at my Wachovia ATM a few hours ago. Hope to get the rest out tomorrow.

:(

[Gormy Cuss]

29. Details that I'd like to know: average withdrawal per customer and types of accounts closed.

Who fled WaMu? The people with more than FDIC insured amounts in the bank, or smaller account holders?
I'd love to see a breakdown.