Washington Mutual Goes Under

Washington Mutual has been taken over by the government in what appears to be the biggest bank failure in history (for now at least). JPM Chase has taken over all of their deposits, which means that no depositors will lost their money at all. They will have the same accounts, the same account numbers and the branches will remain. JPM Chase bought them for their coveted branch locations. However, equity and preferred shareholders are wiped out.

The scary thought is how the mighty have fallen. This isn’t a Wall Street investment banker who was filled with “greed” (according to most conventional wisdom), or where they dabbled in complex derivatives. This is just a savings and loan institution having their mortgages on their books go sour. Yes, they were probably lax in their lending standards as well, but this is an amazing event.

I have to chuckle that just a couple of days ago, a few PF bloggers were promoting WAMU’s deposit rate at 4%. My good friend SVB promoted their 4% high yield savings rate. Nickel actually went a step further and actually opened a WAMU account. He even took screen shots and and went through the process of signing up (well very done). It turns out that last week, my financial advisor called to tell me that WAMU CDs were trading in the secondary market at 10% yield (yes 10%). In fact, the shorter CDs, 1 month and 2 months were at 27% (yes 27%). So if the secondary market for WAMU CDs were at 10%, 4% seems like a ripoff!.

But having said all this, since JPMorgan Chase has bought all their deposits, 4% looks like good value now! Well done Nickel!

Implications – Well, I have a couple of thoughts here. Firstly, it is a great thing that depositors do not lose a single cent. But I think this news is going to spook lots of people. I think there is a real danger of Main Street losing confidence in the banking system.

Many mutual funds also own Washington Mutual, especially value funds. Many funds will be hurt. But the silver lining is that you can tell which fund manager actually knew what he or she was doing.

The banking sector will face even greater consolidation. While consolidation is necessary to take excess lending capacity out of the system, we will be in a situation where banks will get even bigger and more powerful.

For WAMU deposit customers, be prepared to get Chase credit card offers in your mail soon!