Friday, September 26, 2008

WaMu Seized! Largest Bank Failure on Record

From The New York Times:
Washington Mutual, the giant lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators on Thursday night, in what is by far the largest bank failure in American history. ...

Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual, the nation’s largest savings and loan to JPMorgan Chase for $1.9 billion, averting another potentially huge taxpayer bill for the rescue of a failing institution. ...

Customers of Seattle-based WaMu, with $307 billion in assets, are unlikely to be affected, although shareholders and some bondholders will be wiped out. WaMu account holders are guaranteed by the Federal Deposit Insurance Corporation up to $100,000.

By taking on all of its troubled mortgages and credit card loans, JPMorgan will absorb at least $31 billion in losses that would normally have fallen to the F.D.I.C.

JPMorgan Chase, which acquired Bear Stearns only six months ago in another shotgun deal brokered by the government, is to take control Friday of all of WaMu’s deposits and bank branches, creating a nationwide retail franchise behemoth that rivals only Bank of America. But JP Morgan will also take on Washington Mutual’s big portfolio of troubled assets, and plans to shut down at least 10 percent of the combined company’s 5,400 branches in markets like New York and Chicago, where they compete. The bank also plans to raise an additional $8 billion by issuing common stock on Friday to pay for the deal.

Washington Mutual is by far the biggest bank failure in history, eclipsing the 1984 failure of Continental Illinois National Bank and Trust in Chicago, an event that presaged the savings and loan crisis. IndyMac, which was seized by regulators in July, was one tenth the size of WaMu.
I was very skeptical of the claim that WaMu is the biggest bank failure in U.S. history, but it seems that this might actually be true. Journalists usually fail to adjust for inflation. However, even after adjusting for inflation, WaMu is much larger than Continental Illinois National Bank and Trust.

Journalists also rely on the FDIC for their bank data, which means they don't count bank failures prior to 1934, but most Great Depression bank failures were small banks. The most notable bank failure of the time was the December 11, 1930 collapse of the New York Bank of the United States, which had about $2.1 billion in reserves, measured in 2008 dollars.

Lehman Brothers was far larger than WaMu (measured in assets), but investment banks are generally not considered banks in the traditional sense.


  1. This is unfortunate, but it should serve as a wake up call to all American investors. If you want to protect your money, you need to diversify and invest at least some of it overseas. These are hard times for American investing firms. I personally use offshore bank accounts and they have helped me with diversification and asset protection. If you want to read more on why offshore investing is smarter, feel free to visit my website.

    Frank Miller

  2. scary times indeed. It is morally outrageous what the big boys in Wall Street did with money. Thanks a lot!

  3. Id be a bit skeptical of overseas stuff. If your just holding money there is no FDIC protection. Moreover if you are investing in the overseas markets, there is increasing evidence they are catching the same cold we have here in the US. If anything I would keep my investments here because we are further along in this process than the rest of the world is.

  4. For Americans, putting money in an offshore bank account is stupid. The only reason to do it is to cheat on your taxes, but you risk serious jail time to save a little money. You also lose the FDIC protection of an American bank account.

    Stock investors should invest 25-50% of their stock portfolio overseas for diversification, but you don't need an offshore account to do it. Just invest in the Vanguard FTSE All-World ex-US ETF (VEU).

    If you really want to invest in individual overseas stocks, you can invest in ADRs that trade on U.S. stock exchanges. Buying an ADR is no different than buying a U.S. stock.

    If you want to buy individual foreign stocks that don't have ADRs, then open an E-Trade account. They allow you to buy stocks in six foreign countries. Just keep in mind that E-Trade has been severely weakened by the financial crisis. Also keep in mind that it is harder to find financial information on foreign stocks. I even find it difficult to find financial statements for British stocks, which shouldn't be difficult because I'd expect them to be available in English on the Internet.