Washington Mutual's failure: No quick fix for banking system

The biggest bank failure in US history happened Thursday around dinner time, and … life mostly went on as usual.

Sure, the fall of Washington Mutual is a big deal. In ordinary times, it would be easily the big news story of the day or the week.

These aren’t ordinary times.

After recent collapses of other big-name financial companies – Fannie Mae, Freddie Mac, AIG, Lehman Brothers – this seems like just another day in the credit-market crisis.

Of course, the very scale of the maelstrom has reached the point where all eyes are now on Washington, as Congress considers a rescue plan designed to contain the cascade of failures.

But the failure of Washington Mutual sends a significant signal: The banking-system problems are large and defy a quick fix.

WaMu had tried in recent days to find a private buyer, but failed. With the firm's access to credit drying up and some depositors pulling their money out, federal bank regulators decided to act this week.

The Federal Deposit Insurance Corp. decided to seize WaMu and then arranged a quick sale of the thrift institution – good assets and bad – to JPMorgan Chase for $1.9 billion.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," said FDIC Chairman Sheila Bair in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

By moving when it did, the FDIC was able to deal with the problem without having to tap its Deposit Insurance Fund. That fund, built with premiums from banks and other institutions with federally insured deposits, is used when needed to protect depositor accounts. Individual accounts up to $100,000 are completely insured against losses when banks fail.

WaMu’s $307 billion in assets outstrip the $40 billion affected in the 1984 failure of Continental Illinois National Bank, until now the largest US bank failure. Earlier this year, IndyMac failure involved $32 billion in assets.

WaMu’s shareholders will be wiped out – as will bondholders. That shook some financial-company stocks and bonds Friday morning, as investors assessed the risks of other banks failing. One large bank that took a hit was Wachovia Corp., while some that are perceived as stronger were little affected. This doesn’t mean Wachovia will follow down the same slope as WaMu, but it has among the largest exposures to home loans in hard-hit states California and Florida, according to research by Oppenheimer & Co.

The WaMu deal allows JPMorgan to expand its reach westward. But its acquisition comes at a price. JPMorgan plans to mark down WaMu’s loan portfolio by about $31 billion – a sign of the costs the US Treasury may face if Congress gives the go-ahead for the government to buy troubled assets from banks.

At many banks there’s a gap between what they hope certain assets are worth and the reality. But the Treasury plan involves buying those assets – at a price where banks are willing to part with them – to relieve uncertainty about the health of the US banking system. The assets bought by Treasury might fare well or poorly in value, depending on the price they pay and where home prices head from here.

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