How Soon We Forget

A year ago, we were shell-shocked.

Fannie and Freddie were in receivership. Lehman had filed for bankruptcy. AIG needed an $85 billion lifeline. And Washington Mutual, the country’s biggest Savings-and-Loan, was acquired by JP Morgan for pennies, wiping out its stock and bond holders.

Is there any wonder that the market declined 20%?

It’s interesting to look at why WaMu failed. It appears that reckless lending and a couple of deposit runs doomed the bank. But the most curious aspect is the “end-game.” On September 8th, WaMu hired a new CEO to try to sell the bank. He was told by the FDIC that he had until the end of the month to find a buyer. Initially, several big banks were interested. After two frenzied weeks, though, they suddenly stopped looking. On the 25th the regulators seized the bank and announced a pre-packaged deal with JP Morgan.

The Feds must have arranged things with JP Morgan ahead of time. Did word of the impending seizure leak out and scotch any potential non-bankruptcy sale? For WaMu’s investors, the question isn’t trivial. About $15 billion in debt and equity was wiped out.

This may be a case of “loose lips sink ships.” But it’s useful to understand that when billions hang in the balance, it’s not healthy to trust your financial fate to a faceless bureaucrat. I know. I’ve been one.

Douglas R. Tengdin, CFA
Chief Investment Officer
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