WaMu
http://www.patenthawk.com/blog/2009/04/wamu.html
Washington Mutual (WaMu) is a poster child of the mortgage-lending
irrational exuberance that led to the current economic depression. A
run on the bank last September led to its wrenching government-
mandated rescue by JP Morgan Chase. WaMu was the biggest bank failure
in U.S. history, and was sold in a hastily arranged wamu-bam-thank-you-
man auction. WaMu is now suing the FDIC, for selling it off for only
$1.9 billion, claiming it had no such right. Meanwhile, JP Morgan has
filed its own suit, seeking title to disputed WaMu assets, including
its tiny portfolio of eight patents granted and pending, as well as
over 300 domestic and international trademarks, and 1,300 Web domain
names. The Delaware district court judge handling WaMu's bankruptcy
case has given WaMu permission to hire a consulting firm to valuate
the bank's IP assets.

Posted by Patent Hawk at April 16, 2009 10:11 PM | Patents In Business

Comments
http://wamustory.com/

http://wamuqd.com/

Posted by: HROLLER at April 20, 2009 2:11 PM

On Thursday September 25th 2008, Washington Mutual Inc aka WaMu Inc.
or WMI or WaMu, common shares trading under the symbol WM, opened at
$2.62, rose to $2.69 within the first hour, and then fell on average
for the rest of the day and closed at $1.69. In after hours trading it
quickly dived without stopping to as low as $0.09 and then closed a
couple hours later at $0.16. Take note it fell 90.5% just in after
hours. During the regular day it fell 35.5%. For the entire day it
fell 93.89%. All these percentages are based on the open, and
excluding the pre-market trading data, which I do not have. For the
day, the DJIA rose 196.89 points, and closed at 11,022.06

Clearly anyone who held WaMu through the day experienced a financial
wipeout in their position. What caused this wipeout? In a statement
issued on the night of September 25th the Office of Thrift Supervision
(OTS), an office of the US Treasury, said “An outflow of deposits
began on September 15, 2008, totaling $16.7 billion. With insufficient
liquidity to meet its obligations, WaMu was in an unsafe and unsound
condition to transact business. The OTS closed the institution and
appointed the Federal Deposit Insurance Corporation (FDIC) as
receiver. The FDIC held the bidding process that resulted in the
acquisition by JPMorgan Chase.” (link). WaMu had been sold and seized.
The process of selling and seizing WaMu had actually begun prior to
September 15th, reportedly having been started during the first week
of September, 2008.

Washington Mutual Inc is a bank holding company that owned two banks,
the Washington Mutual Bank, Henderson, NV and a subsidiary of that
bank, Washington Mutual Bank, FSB, Park City, UT. The first mentioned
bank was the main banking operation, and the focus of everyone's
attention. Both banks received the same treatment simultaneously on
September 25th, 2008. For brevity they are usually referred to
singularly as the Washington Mutual Bank aka WaMu Bank or WMB or WaMu.
For the rest of this text this convention will be followed and they
will be referred to as one enterprise and principally referring to the
vastly larger Henderson NV incorporated bank.

Seventeen days earlier on Monday September 8th, the Board of
Washington Mutual removed CEO Kerry Killinger due to losses from
subprime mortgages and credit card loans and replaced him with Alan
Fishman. WaMu simultaneously announced (link) that they had negotiated
a Memorandum of Understanding with the OTS concerning aspects of the
bank’s operations. It concluded with this sentence. "The business plan
will not require the company to raise capital, increase liquidity or
make changes to the products and services it provides to customers."
WaMu's new CEO Alan Fishman was experienced in bank mergers. In 2004
as CEO of Independence Community Bank Corp he completed a merger with
Staten Island Bancorp, Inc and then in 2006 he worked out the well
executed sale of Independence Community Bank Corp to Sovereign
Bancorp. His employment and hefty salary with WaMu were seen as an
indication WaMu was setting itself up for a merger.

For the ten days prior to the seizure WaMu experienced an acceleration
of withdrawals, and corresponding draw downs in its liquidity, that
the regulators at the OTS and FDIC say justified a seizure of the
bank. The accounts that withdrew were mostly large retail accounts of
over $100,000, which at the time was the FDIC insurance maximum. These
accounts were used primarily for payroll purposes. These accounts were
mostly in California, where the memory of the IndyMac bank seizure was
likely on their minds. The speed and amounts withdrawn do not qualify
as a bank run, as a bank run is a complete wipeout of deposits over a
few days. At most it could be characterized as a walk on the bank. The
withdrawals were done by electronic banking over the internet and by
wired funds. It was not in the news, people were not lined up outside
the bank. WaMu was the largest thrift or savings & Loan in the nation,
and the sixth largest bank by deposits. They had 2,239 branches in 15
states, concentrated in the west and south. They were large enough
that the Federal Reserve assigned them onsite full time bank
inspectors to monitor, among other things, liquidity levels. The
Federal Reserve was witness from beginning to end of the liquidity
draw down.

A walk on a bank, is a mild form of a run on a bank. Bank runs were
typical of the great depression which started in 1929. Customers
wanted their cash in their hand, because if a bank died and locked its
doors, their cash would be forever beyond their reach. Bank runs have
an effect on the public and the government that tends to snowball and
be a self fulfilling prophecy. If a new bank has a problem, because a
bank run has happened recently, it may be happening again now, so they
do a run on that bank etc. Bank runs close banks down, and draw their
cash down to zero. A slew of bank runs that closes banks down is known
as a bank panic.

In response to the bank panics of 1929 and the early 1930's, in 1933
the government created the Federal Deposit Insurance Corporation
(FDIC). The FDIC is a government corporation that provides insurance
on bank deposits. The primary reason for creating the FDIC was to
prevent bank runs, from the demand side, depositors demanding cash all
at once at the bank, which had been the typical bank run scenario in
the depression of the early 1930's. The mechanism to do this was
deposit insurance so that even if a bank locks its doors, your
deposits are covered up to the insurance maximum and you will be paid
your money from the insurance fund. At the time of the WaMu seizure
the insurance covered up to $100,000. In large part due to the WaMu
catastrophe the FDIC has implemented a temporary increase in the
amount of deposit insurance, and it is now $250,000 until Dec 31,
2009, unless extended. The Chairman and four Board of Directors of the
FDIC are all appointed by the President and confirmed by the Senate,
with no more than three being from the same political party. The FDIC
is self funded through its insurance premiums, which are paid by the
banks. The FDIC has an immediate $30 billion line of credit with the
US Treasury, and procedures are in place if more credit is needed.
From 1996 - 2006 the FDIC waived the collection of the bank insurance
premiums as it was at the upper limit of its legal reserves.

The Federal Reserve system was created in 1913. One primary reason for
creating the Federal Reserve was to prevent bank runs, from the supply
side, the running out of cash at the bank, which had been a problem
causing bank runs in the recession of 1907. The mechanism for doing
this is by the banks loaning liquidity to each other in a process
called Federal Funds, which is short for Federal Reserve Funds. Then
there is a process of a bank borrowing straight from the Federal
Reserve called the Discount Window. The Federal Reserve is a private
corporation whose stockholders are the biggest banks in the country.
The Chairman and the six Board of Governors of the Federal Reserve are
all appointed by the President and confirmed by the Senate. This is
the legal extent of the Governments involvement with the Federal
Reserve. Thus the government has weak control over the actions of the
Federal Reserve. All banks in America are members of the Federal
Reserve System. All paper money is printed by the Treasury per the
amounts ordered by the Federal Reserve. All electronic money, wires,
credit cards, debit cards etc and all check book money, is under the
monetary policies of the Federal Reserve. The Federal Reserve controls
how much money, (cash, electronic, check book) banks have on hand
through its regulations and membership requirements. It maintains this
flexibility so that it may meet the liquidity demands of banks.

WaMu was the largest thrift in America and part of the Federal Reserve
System. WaMu had some no pay and slow pay mortgage loans, like most
banks in America today. These loans were not an overwhelming problem
for WaMu, as they had enough cash reserves on hand to last two years
at the current bad loan rate.

On March 10, 2000 the Dot Com bubble burst. The Federal Reserve began
lowering interest rates to make borrowing more attractive, to
stimulate the economy out of the slump caused by the Dot Com bubble
bust. On September 11, 2001 there was the WTC-Pentagon 9-11 tragedy,
and the Federal Reserve continued lowering interest rates to keep the
economy moving. On July 30, 2000 the Federal Funds rate was 7.03% and
by July 30, 2003 it was 1.03%, a drop of six points or 85.7%. The
swing from March 2000 was probably wider, but the data older than July
2000 could not be found. People saw this as a good time to take out a
mortgage as interest rates were low. For banks home loans became an
even more important source of borrowers. Competition was high and
banks lowered requirements to receive loans, to make business and to
get as big a share of the business as they could. As time went by to
maintain the business, mortgages were being more loosely structured
and borrowers more liberally accepted. The least stringent home loans
were known as subprime loans, as they were made to less than prime
customers. Loan structures such as ARMS and HELOC were used. Often the
mortgages were structured with low payments up front, and higher
payments in the later years. Often these mortgages were sold to other
lenders after they were written, and WaMu had purchased a lot of their
mortgages. As time passed some subprime borrowers were unable to make
their payments on time, others could not make their full payments, and
some lost the ability to make any payments at all.

Banks are regulated and they have to lend the appropriate amounts of
money to the appropriate people, or else they put depositors,
borrowers, and investors all at risk. The OTS and FDIC are two of the
government agencies that regulate banks. The OCC being the third.
Regulation was lax throughout the banking system during the 1990's and
early 2000's and many banks did things which regulators should have
caught and should not have allowed. One OTS regulator, Darrel Dochow,
who was demoted in 1989 for misregulating the infamous and seized
Lincoln Savings and Loan, had risen again within the OTS and was now
in charge of Washington Mutual, Countrywide, IndyMac and Downey
Savings and Loan, among other banks that have been seized or merged in
the current credit crisis. This type of lack of regulating stamina
which tends to need to be followed up by a bank seizure is a definite
part of the current financial crisis. If regulators did their jobs and
enforced banking regulations, seizures like WaMu, and much of the
current financial crisis could have been avoided. This problem extends
to the SEC which regulates stock trading and has been lax on their
watch this whole time as well. The SEC has been like this probably
because they have no way to enforce their laws and regulations and do
not want to show that. Just as the FDIC has no way to provide deposit
insurance, and seized WaMu so they did not have to show that either.
The entire credit crisis is due to the governments inability to
regulate, enforce regulation, and even trace what is happening in
America finances. The foxes are running the hen house, and the
government is left to just hand them whatever banks and money they
want to keep the financial system moving.

A bank’s assets are its loans, because loans are where people owe you
money plus interest, an income stream. Deposits are a liability,
because the bank owes the depositor the money, plus interest, and is
liable for its payment on demand.

Insolvency is when a person or company can not meet the current
obligations or payments on their debts, using whatever capital means
they have available to them, including selling assets. WaMu borrowed
money from citizens like all banks in many forms, Cds, secured bonds,
unsecured bonds etc. to get money to do its business. WaMu was
perfectly able to make the interest payments and redemption payments
on its debts. WaMu was not an insolvent or bankrupt bank. WaMu held a
lot of small deposit accounts, and depositors make withdrawals, thus
liquidity, having funds available on hand for withdrawals was WaMu’s
primary concern.

Bankruptcy is a courts legal recognition of a company's insolvency.
There are three types of bankruptcy, Chapter 7 liquidation, Chapter 11
reorganization, and Chapter 13 personal bankruptcy.

Liquidity is when the cash on hand and current income stream is able
to meet or beat the current debt service and other liability
requirements, without having to sell assets. When the OTS said WaMu
had "insufficient liquidity to meet its obligations", this was only a
forecast, and not a fact. They were stating an opinion based on if the
walk on the bank continued at the same rate for some time, and without
intervention. This would be a highly unlikely occurrence. Actually no
bank has that kind of liquidity as the fractional reserve system
rejects that principle. It has now become know that there was a system
wide rush of withdrawals the week after the Lehman bankruptcy, that
totaled $550 billion in money market accounts alone, and this begs the
question, during that week how bad were WaMu's liquidity ratios
compared to the other bank's liquidity ratios for that same week. Was
WaMu the only bank on course for "insufficient liquidity to meet its
obligations" that week, and since this is doubtful, why was WaMu the
only bank groomed well ahead of time for a seizure.

As subprime loans fail to pay, a bank is losing its income stream, or
it is losing its liquidity, as the monthly checks are not showing up.
Less money coming in means less is available to pay the monthly
interest to bond holders, Cds, savings deposits and also for customer
withdrawals and redemptions etc. WaMu’s liquidity was slowly shrinking
due to its subprime loan failures, but it was not at a problem level,
and WaMu was seeking solutions. In March 2008, JPMorgan Chase offered
to buy WaMu for $8.00 a share, hoping the bank would accept it as a
way out of its creeping liquidity problem. For JP Morgan it would have
meant a huge increase in their branch network and deposit base. WaMu
declined and instead on April 8th took a seven billion dollar cash
infusion, two billion from an investment firm TPG Capital, in trade
for 822,857 new common shares at $8.75, with the remainder preferred
shares convertible to common shares, and five billion from other
investors in trade for new common shares. Total new common shares
issued at the onset of this deal being 176 million, and more created
when the preferred shares converted. See Note 9 on the bottom of page
21 here. David Bonderman the CEO of TPG had been on the WaMu Board of
Directors from 1997-2002. With this new deal he once again became a
member of the Board of Directors. Another part of the deal was that
WaMu had to accept an anti-dilution clause wherein if WaMu sold
itself, or issued new shares worth over $500 million, for less than
$8.75 a share, within the next eighteen months, TPG would be paid the
difference against their shares. Shareholders disliked this whole
deal, but they approved it to avoid stiff built in penalties. Although
this cash infusion helped, there was a liquidity problem for WaMu in
July 2008 when IndyMac failed. After IndyMac most depositors returned
their money, but from then until the September 15th 2008 Lehman
bankruptcy there was a slow drain on the total level of deposits. When
Lehman went bankrupt on September 15th the rate of deposits leaving
WaMu accelerated. WaMu was aware of the problem, and in early
September 2008 before the Lehman bankruptcy, WaMu made the decision to
seek a buyout merger. On September 8th they hired a new CEO Alan
Fishman. On September 17th they announced they had chosen Goldman
Sachs as a broker to find a buyer and work out a deal. On this same
date TPG waived its anti-dilution clause to help facilitate the sale
of WaMu. There were five to seven major banks interested, including
Banco Santander, Citigroup, HSBC Holdings, Toronto-Dominion Bank,
Wells Fargo and JPMorgan Chase.

The entire Savings and Loan system is in a similar situation. To
receive a Savings and Loan charter you have to limit commercial
lending to 20% of assets, of which half must be for small businesses.
To receive advances from the Federal Home Loan Bank, mortgages and
consumer related lending must be 65% of assets. Everything is
structured to put S&Ls into doing predominantly home mortgages.

Congress under pressure from both the Federal Reserve and the Treasury
was being urged to authorize government funds to bailout the banks
with the subprime loan failures and thus the increasing liquidity
problems. The idea at the time was the government would create new
government obligations, bonds of various term lengths, and swap these
for the banks’ subprime loans. As the government has the ability to
control tax revenue by increasing taxes, its ability to pay its debt
obligations is the highest you could have, because it can and does
enforce the payment of taxes. If it needs money to pay a debt it
increases taxes. The government would put itself in charge of
collecting the subprime debts as well, and defaults are more easily
absorbed by them as they are also offset by its tax collecting
abilities.

The bailout loan swap plan would insure the banks current income
streams would increase as all payments would be made, and also be
quite certain going forward as the government is not likely to go out
of business. This plan is essentially the $700 billion bailout plan
that was being discussed in Congress at the time. This plan would have
strengthened WaMu considerably, and even to the point where some were
speculating WaMu would not have to sell and could continue on as an
independent bank. It also made WaMu and all the banks a much better
investment or merger candidate as much more of the loan portfolio
value and income streams would be certain, and known. In the first
week Goldman Sachs had been unable to find WaMu a buyer. The one huge
obvious problem was the bailout talks and what their results would be,
and the end effect that would have on the income value of WaMu's loan
portfolio. There was another problem too though. Unknown to anyone the
FDIC had already been offering WaMu secretly to the same potential
customers that Goldman Sachs went to, but as a branches, deposits and
loan portfolio only sale, free of all financial obligations to bond
holders and of all claims of shareholders, to be done by private
auction, and implemented by a WaMu bank seizure. This had killed
WaMu's chance to find a buyer from another bank, and WaMu was now
talking to two private equity firms, the Blackstone Group and the
Carlyle Group, to see if they would be interested in buying the bank.

WaMu’s average account was only $5,200.00, well within the FDIC
insurance range. In aggregate these FDIC insured accounts were much
more in value then the FDIC had in cash to pay insured depositors.
Since if it ever came down to it, the FDIC would be unable to make
good on its insurance plan, without borrowing from the Treasury, the
FDIC had offered outwardly to help Goldman Sachs in brokering a deal
for a buyout of WaMu. As soon as the rates being received for the
subprime loans in the bailout was known the banks could then establish
a value and price for the bailed out WaMu. This makes sense, and this
is what investors were told and thought, but the main potential
customers already knew WaMu was to be seized and auctioned, and for
that to work it had to occur before the bailout. It was not WaMu that
had the liquidity problem, it was the FDIC that had the liquidity
problem, and the FDIC chose to protect what little liquidity they had
by preemptively and unjustly seizing WaMu. The FDIC decided to avoid
any chance of being caught short of cash, and used their regulatory
powers to transfer their cash problem onto the WaMu shareholders and
debt holders by wiping out their investment positions.

There is a bit of a jumble in the FDIC's legislation here. One is any
potential bank failure on the horizon that could threaten the FDIC's
funds and thus ability to insure deposits should be seized before that
event in an early resolution seizure. The second is that any bank
seizure that could cause systemic risk, should not be seized, and the
bank should be handled another way. These two regulations describe the
same banks. There is not a precise definition for either regulation.
If the bank's failure could take down the FDIC it qualifies as a
systemic risk ipso facto. Similarly there is a regulation that the
FDIC must transact seizures at least cost to the FDIC, and another
regulation that they must conduct operations in a manner which
maximizes the net present value return from the sale or disposition of
seized assets. How do both parties win at this game? The FDIC chose
early resolution seizure over systemic risk for WaMu and now we are
all suffering from the systemic risk, which will go on for years.

The White House and Congressional Finance Committee members began
discussing the bailout together on Wednesday September 17th, the same
day that WaMu announced that it was for sale. The actual Congressional
hearings were started the next day, and were held everyday thereafter.
The bailout, now known as The Emergency Economic Stabilization Action
(EESA) of 2008, was passed Saturday October 2nd and made law on Sunday
October 3, 2008. The first implementation of bailout funds was the
purchase of preferred shares in twenty-five US banks, rather than a
debt swap. This was a bailout technique that England had recently used
for handling the credit crisis.

Just previous to the initiation of the bailout proceedings, due to
falling stock prices in financial issues, and many of the banks, for
the entire year, thirty day bans on short selling were introduced. The
first one announced Tuesday July 15th was on nineteen finance stocks,
and solely a ban on naked short selling. Kerry Killinger then CEO of
WaMu had asked Treasury Secretary Henry Paulson to put WaMu on that
list, but he was denied. There was no valid reason for WaMu's omission
or denial. On Wednesday September 17th naked short selling was banned
on all stocks, and on Friday September 19th all short selling of any
kind was banned on 799 finance stocks, and this was good until
Thursday October 2nd, and was later expanded and extended. WaMu was on
the list of 799 finance stocks. All short positions on the 799 stocks
had to be closed out within three days, and thus be covered by the
market close of Wednesday, September 24th. Manipulation is the reason
the SEC issued the short bans. Hedge Funds and other shorts can drive
a stock price down and profit from the free fall, or on options
trades, or on buying to go long at a reduced price, and it is possible
with enough coordination to drive a company out of business and take
it over. Currently shorting is very profitable as the uptick rule was
removed and naked shorting has been allowed. It is interesting to note
that there was little short covering in WaMu, thereby disobeying a SEC
order, and that the bank was coincidently seized the day after all
shorts should have been, but were not, covered. It has now known that
the shorts covered in the days of the post seizure trading and only
had to pay pennies a share to cover, and made huge profits. When the
uptick rule is in place and naked shorting disallowed most people have
no problems with short selling. Shorting provides a counter balance to
longs and when regulated well can be a stabilizing influence on a
stock's price. Shorts sell stocks at high prices and buy them at low
prices and profit the difference. When stocks drop, shorts buy,
creating demand at low levels and slowing and reversing descents,
conversely when stocks soar, shorts sell, and reduce run away
inflation of a stock's price.

On Thursday September 11th WaMu provided an Update on Expectations for
Third Quarter Performance (link), with the official results scheduled
for Wednesday October 22nd. This is part of their release, "The
company expects its capital ratios at quarter-end to remain
significantly above the levels for well-capitalized institutions and
continues to be confident that it has sufficient liquidity and capital
to support its operations while it returns to profitability. Net
interest income is expected to be in line with the second quarter. The
third quarter provision for loan losses is expected to be
approximately $4.5 billion, down from $5.9 billion in the second
quarter while reserves are expected to build, as described in greater
detail below. Net charge-offs are expected to increase by less than 20
percent in the third quarter compared with a growth rate of nearly 60
percent during the second quarter. Non interest income is expected to
be approximately $1.0 billion, up significantly from the second
quarter, reflecting continued growth in depositor and retail banking
fees (up 6% from the second quarter) as well as stronger MSR results
due to slower prepayment speeds. Non interest expense is expected to
be down approximately $200 million, reflecting expectations for lower
resizing costs and lower foreclosed asset expense." It also had this
to say about its Liquidity and Capital: Retail deposit balances at the
end of August of $143 billion were essentially unchanged from year-end
2007. In addition, the company continues to maintain a strong
liquidity position with approximately $50 billion of liquidity from
reliable funding sources. The company's tier 1 leverage and total risk-
based capital ratios at June 30, 2008 were 7.76%, and 13.93%,
respectively, which were significantly above the regulatory
requirements for well capitalized institutions. The company expects
both ratios to remain significantly above the levels for well-
capitalized institutions at the end of the third quarter.

Things were better than the previous quarter. Both capital and
liquidity were well within acceptable limits. The worst thing was that
the level of deposits was were it had been at the end of 2007. The
lack of growth in deposits was a primary reasons WaMu was seeking a
merger. The deposits being at this level was not an immediate problem.
Considering there were possible benefits from the bailout, and once
the bailout details were known one way or another, an orderly buyout
merger would be possible, things were looking pretty good.

On Monday September 15th Standard & Poors issued a downgrade of some
of WaMu's bonds, but made this positive statement about their
liquidity. " WAMU's overall liquidity profile at the bank and the
holding company is positioned to withstand this weak credit cycle
through the end of 2010. During the past year, WAMU has conservatively
and prudently managed its holding company liquidity position. It faces
minimal debt maturities through the end of 2009. WAMU reaffirmed that
its outstanding debt is not subject to rating triggers or other terms
that would cause acceleration."

Also on September 15th, Lehman Brothers, the fourth largest investment
bank in the US, declared Chapter 11, bankruptcy reorganization. Lehman
Bros was an investment bank, not a depository bank. It was the largest
bankruptcy in US history. It was the first major Wall St firm to
declare bankruptcy in recent memory. In March 2008 Bear Stearns
another large investment bank, had come close to bankruptcy, but the
government worked out a deal for them where JPMorgan Chase ended up
purchasing Bear Stearns. The Lehman Bros bankruptcy put everyone on
edge.

On September 18th Alan Fishman the new CEO released a letter (pdf
link) to shareholders in which he stated "Capital ratios describe the
financial strength of a bank. Our ratios continue to be well in excess
of the levels that government regulators require of “well capitalized”
institutions. We also have an ample supply of funds on hand to meet
your needs and the needs of our other customers and our day-to-day
operations." That the WaMu bank was well capitalized has never been
disputed and the OTS in a Fact Sheet (pdf link) they issued on WaMu on
September 25th 2008 said "WMB met the well capitalized standards
through the date of receivership."

Thus going into the week of Thursday September 25th for WaMu and WaMu
longs there were three reasons for positive expectations, first large
short positions covering, second a possibly beneficial outcome to the
bailout meetings, and third shortly after the congressional hearings a
buyout merger. The total amount of outstanding shares short was 26% of
the float, or about 420,000,000 shares. Who were these shorts? Did
JPMorgan Chase have a large short position, did Citigroup?

The three credit ratings services all gave WaMu debt downgrades during
the week, first by Moody’s on Monday September 22nd, then Fitches on
Wednesday September 24th and finally Standard & Poors on Wednesday
evening September 24th. Essentially they were all downgrades from junk
to junkier. Some people saw this as window dressing being done before
the bailout was passed, and that it was being done so that whatever
plans the bailout came up with, the debt would be freshly rated for
carrying out that decision making. Many did not see it as a panic
situation for this reason, and when one service down grades you, the
others always automatically follow.

One issue of the bailout meetings was the rate at which the government
would swap for the subprime loans in the plan then under discussion.
Should it be the hold-to-maturity value, ie the full anticipated value
when issued for its maturity or some reduced or discounted value,
particularly the current market value, known as mark to the market, as
determined in their distressed current condition and its effect on
their current trading levels. Both Federal Reserve Chairman Ben
Bernanke and then Secretary of the Treasury Henry M. Paulson, Jr.,
were quite clear and stressful when speaking publicly about this that
the subprime debt should be purchased at hold-to-maturity or full
value to adequately capitalize the income streams and liquidity to the
receiving banks so that they would be in a strong position to generate
business at the local levels and keep the economy from slipping into a
recession. They also stressed for similar reasons that the bailout
should insure that no large banks fail, and that numerous small bank
failures would not be acceptable either. WaMu was the largest thrift
in the nation and all indications were that it was a prime candidate
to succeed from the bailout. WaMu though made it clear that if a
merger was not completed before the bailout they would continue to
look for a merger partner after in any case. As events unfolded the
sincerity of those that made remarks concerning no large bank failures
has to be questioned, and it has to be questioned if they were
deliberately misleading the investing public. In general bank share
prices drifted downward as the bailout meetings got underway. There
was bickering, Pres. Bush invited both Senators McCain and Obama to a
White House meeting that ended chaotically. I personally was unable to
watch the hearings on TV, but those who did, did not seem inspired.
The expected short squeeze in WaMu from the SEC ban on shorts in
financials had not materialized. It should have taken seven days at
recent typical daily volume levels for the number of shorts to cover.
Volume levels for the 22nd, 23rd and 24th do not show this short
covering. There was higher volume on the 25th, but not enough for the
shorts to have covered, and this volume was all related to the sell
off from that days seizure talk and actual seizure. If JPMorgan Chase
or Citigroup or their confidents had been a major shorter of WaMu they
had not covered. As usual the SEC and no one in government has ever
had anything to say about these uncovered short sellers, and they
can't say anything, or they will expose their inability to enforce
regulation of the very systems they are designed to control.

Wednesday evening September 24th President Bush gave a televised
speech to the nation on the economic problems and the bailout. One
remarkable statement he made was that the subprime debt would be
purchased at current market, very depressed, prices. This was the
exact opposite of what the Federal Reserve and the Treasury had been
saying. It also seemed to contradict the purpose of doing a bailout.

Thursday September 25th was in general a day bank shares drifted down
and the hearings produced no results. WaMu's stock began falling
within the first hour, and this was attributed to the downgrades of
the previous day and evening. I worked that morning, and was not at my
computer until after the regular trading. I do not watch CNBC either,
but during the day CNBC reported they had leaked information that WaMu
would be seized by the FDIC as a bank failure. They did not report a
source for this leak. This leak accelerated both the large retail
online withdrawals of deposits from WaMu and the falling stock price
for the day for WaMu. WaMu’s stock fell almost a whole dollar and 35%
for the day. I remember getting home in the early afternoon west coast
time, and the market had just closed. I was taken aback by the dollar
drop for the day. Looking on the message boards I thought I understood
the sellers concerns, but believed that the government would prevail.
No one mentioned a seizure. This was the mindset that week, in fact
Warren Buffett considered one of the best investors going, had late
Tuesday September 23rd bought $5 billion dollars of Goldman Sachs
stocks for essentially the same reason. As by now all shorts were
supposed to be covered and out of the market, even though there was no
evidence this ever happened in WaMu, the steep fall in price was being
partially explained as due to this normal braking mechanism to the
market having been removed. I looked at an early after hours quote and
it was a few pennies from the regular market close of $1.69. I surfed
onto some noninvestment things. In less than an hour I checked back
and the quote was $0.52. At this point selling was of little benefit
and I decided to hold, for a possible recovery. A drop of another
dollar and two dollars for the day. I went to the Yahoo WM message
board and began looking at posts. Some people were up in arms, some
people said it was oversold panic selling etc. I stayed and watched
the posting and began reading news sites for news. First there were
posts on WaMu closing. This made no sense. I saw a post where the word
seized was used. It had only one news source anyone could find backing
it. I was unaware of CNBC’s earlier reporting in the day.

WaMu’s price by now was at about $0.16 where it would close, though it
did go as low as $0.09 from my memory. It was discussed what they
meant by seized. At about this time after hours trading ended and
there was suddenly a storm of news stories about WaMu and the seizure
and we learned the following. Most investors understood that
Washington Mutual Inc was a holding company trading under the symbol
WM and that the holding company was the owner of the Washington Mutual
Bank. The shares were shares of the holding company, not the bank.
Many banking companies are set up this way and here is a list of the
top fifty bank holding companies. The OTS and FDIC recognized this as
well and chose to exploit this corporate structure. Without a public
word they realized that the WaMu bank could be seized and that the
shareholders and bondholders of Washington Mutual Inc. would lose the
primary asset of their company, but that their claims would not be
directed at them for the possession of the asset, but rather would be
directed at the holding co, which they owned shares in. Had everything
been exactly the same for the WaMu Bank, but that the shares and debts
been in the bank’s name and not the holding companies, it is likely
the bank would not have been seized. That the corporate structure
allowed a loophole to screw the shareholders and debt holders is
really the reason the WaMu bank was seized. At about 7:00pm JPMorgan
Chase announced they would be holding a Conference Call at 9:15pm. The
conference call was used to announce to the world they now owned WaMu.
JPMorgan Chase also released this press release that evening, and
later this presentation (pdf.link). In the eleven trading days
following the seizure, Friday September 26, 2008 through Friday
October 10, 2008, the markets crashed. The DJIA fell 24.15%, the
NASDAQ fell 24.45% and the S&P500 fell 25.88%. They have yet to
recover.

Let us assume for the sake of arguement that 1,000 people in the Wall
St and Manhattan circles had advance knowledge of the FDIC's secret
plan to seize and auction WaMu. This would be a large number of in the
know people for such a critical deal in my opinion. What are the odds
that one of these 1,000 people of the seven million people in New York
would be called upon to give an interview on the subject of WaMu just
prior to the seizure and bailout vote. What are the odds that this one
selected in the know person deemed worthy enough to just be freely and
for no reason given this information, during this critically timed
interview, is also careless enough to just let fall from his lips that
there is a secret auction in the works. Then the follow-up is that
this seizure, by far the largest bank seizure in US history,
mysteriously has to be moved up a day and results in an ambush of all
the investors who normally would have opted out of the risk and sold
before the weekend. The odds are probably about the same as of the
planet being taken out by a huge asteroid.

JPMorgan Chase is one of the primary stockholders of the Federal
Reserve which means they have the power to force favors from the
Federal Reserve. The CEO of JPMorgan Chase, Jaime Dimon, sits on The
Board of Directors of the Federal Reserve Bank of NY. Citigroup is
also a stock holder of the Federal Reserve. It is the Federal Reserves
job to insure that its member banks have the liquidity to transact
business. The member banks borrow and lend among themselves
electronically every night to keep each other liquid. This is called
the Federal Funds. If need be a bank can also borrow directly from the
Federal Reserve itself through a process known as the Discount Window.
The FDIC was in a jam in that if WaMu was ever deprived of funds from
the Federal Reserve, say for fear of not being paid back, and a bank
run ensued, the FDIC would not be able to cover the insured deposits
without borrowing from the Treasury. There is some slight differences
in the amount the FDIC would have had to cover. Some estimates leave
the FDIC with a nominal balance. Apparently the thought of having to
borrow funds from the Treasury so early in the credit crisis was
considered too much of a defeat for the FDIC to be comfortable with.
Unknown to anyone in the public the FDIC was working on a secret
solution deal. On one hand they were talking with WaMu about helping
them find a buyer and the valuation of its loan portfolio, and
secretly on the other hand they were allowing JPMorgan Chase and the
other banks to have complete access to WaMu's books and were offering
to seize the bank and sell it to them in a private auction, which
would free the purchaser from all liabilities to the debt holders, and
all claims from shareholders. This would get the FDIC out of their
jam. The words Toxic Paper, Toxic Debt, Toxic Loans etc suddenly were
all over the newspapers and the internet. The idea that the FDIC’s
cash balances could not make good on its insurance liabilities was
being well advertised, but their credit line and credit abilities with
the Treasury were seldom mentioned. Though borrowing from the Treasury
would make the FDIC solvent, accounts over $100,000 would still lose
everything above $100,000. These accounts read the writing on the wall
and began silently electronically removing their funds from WaMu. As
mentioned the Federal Reserve inspectors would be on hand to witness
this day by day. WaMu’s cash on hand and hence liquidity was being
drawn down. Did the Federal Reserve step in and loan them this
liquidity as the system is set up to do for just these type of
incidents. No they did not (pdf link). Was the reason because WaMu
still had plenty of liquidity left, or was there some cooperation
going on between the Federal Reserve, the FDIC and the Treasury? This
all occurred as the Congressional bailout meetings were underway.

Once the bailout was completed, the plan being discussed, would have
WaMu’s bad subprime loans swapped out for good government paper, maybe
some at 100%, maybe some at a discounted level, maybe some at market
level. WaMu’s improved condition in any case would make it a much more
solid purchase after the bailout then before. WaMu was being set-up in
a triangulation of cross fire, between the Federal Reserve, the
Treasury Department's OTS, and the FDIC, to affect a seizure and a
fire sale at auction. The beneficiary’s of this would be the FDIC,
which would be removed of the potential problem of having to go into
debt to the Treasury if it ever needed to pay the insurance on WaMu's
deposits, the Treasury which would now not have to considering ever
loaning the FDIC any money to cover the deposits, and the big winner
the Federal Reserve/JPMorgan Chase which ended up owning WaMu, its
loan portfolio, its badly needed cash deposits, and its jewel of
branch networks, free of all bondholder obligations and claims of
shareholders.
There is also the consideration that JPMorgan badly needed the cash
from the deposit base of WaMu to help shore-up its very leveraged
derivatives trading transactions. JPMorgan's acquisition of Bear
Stearns, also done with the government's help, is thought to have been
done for this same reason. If JPMorgan were ever unable to fulfill
their ends of their derivatives trades, and collapse, it is thought it
would bring down all of Wall St and the economy. Some of these trades
were with WaMu and these trades would self cover and cancel, just as
it was done with their Bear Stearns trades. Thus the actions of the
OTS, FDIC and Federal Reserve may not be entirely about money, but
also about their reputation and their performance of duty, and that
they chose to kill off WaMu to save their own necks by helping to save
JPMorgan's neck. WaMu’s parent company Washington Mutual Inc
shareholders and bondholders though were forced into taking an
unjustified catastrophic and total loss. The investors of Lehman
Brothers have also pointed the finger at JP Morgan and accused them of
withholding liquidity from Lehman causing their collapse.

Probably the single worst thing about the WaMu seizure was it
destroyed the financial order of American capitalism for finance
companies by removing the rights and claims of all investors on the
corporation, and in turn removed the priorities in rights and claims
of the different securities issued by finance corporations and
purchased by investors. John Hempton who blogs for the Bronte Capital
Blog said it well in his September 28, 2008 entry The Reckless,
Irresponsible Seizure of Washington Mutual (link). "Now there is not
much raising of wholesale funds by banks at the moment. But after this
deal there is likely to be less. It is simply the case that there is
now a new risk for people who provide wholesale funding – and that
risk is that the government will unilaterally abrogate their rights –
without appeal, without due process and without accountability....that
the most important function of government in a capitalist society is
provision of a framework by which property rights can be defined and
enforced as this is the key to making a capitalist society
function....The Government is now acting as if the framework does not
apply to them....That is bad whatever your political persuasion....But
in the process they have doomed about two thirds of the US banking
system....heaven help us." Please read the entire entry at the link.

The Federal Reserve watched WaMu, while knowing their own
stockholders, JPMorgan Chase and Citigroup, were participating in
secret backroom discussions with the FDIC wherein it was decided the
Treasury Department's OTS would seize WaMu for "lack of liquidity" and
give it to the FDIC who would have it auctioned off in advance.
Included would be the branches, deposits, and the loan portfolio
including subprime mortgages, which were eligible to wash off as a
write down to the final amount paid, and what was not written down and
washed off, would be eligible for swaps under the bailout plan. All
for a fire sale private auction price, and leaving WaMu Inc the
holding company hanging onto all the obligations to the bond holders,
as well as all the obligations to the preferred shareholders, and all
claims by common shareholders. The winner, at $1.9 billion was
JPMorgan Chase. JPMorgan Chase was able to take a $31 billion write
down on the subprime mortgage loans as part of the deal, even though
WaMu had previously calculated $19 billion as the bad loan amount. The
unsecured mortgage loans JPMorgan took and could not write down would
still be eligible for the federal bailout plan. JPMorgan also got the
WaMu bank branches throughout the country especially the west and
south they had wanted so badly. If JPMorgan Chase or any of the other
banks in the secret dealings had major short positions, they had not
covered. When WaMu’s stock price collapsed after the seizure, they
could cover for cheap, or maybe just be able to hide the fact. When a
company declares bankruptcy shorts do not have to cover - it is game
over. That a lot of the shorts never covered in WaMu and that certain
large banks were privy to the FDIC’s plan to seize and close the bank,
would make it simple for these banks, their friends, confidants, and
all their proxies, to never cover their shorts and keep a large
profit. This would help cover a lot of bad derivative trades and may
be why it is not being discussed. That nothing has been written about
this makes it even more likely this is what happened. This would be
insider trading, an illegal act. As Congress discussed the bailout on
Thursday September 25th, and after regular market hours, the OTS
seized control of WaMu, and turned it over to the FDIC who immediately
turned it over to the auction winner JP Morgan Chase. This was
announced after all trading had ended, simultaneously as one single
packaged story. Bank seizures are traditionally done on Friday
evenings so the weekend can be used to sort out the paperwork and
details. Investors planning to watch WaMu's Friday trading action and
planning to decide whether to hold or not considering a possible
Friday evening seizure were robbed of the opportunity. The OTS/FDIC
said they chose Thursday because of the leaked seizure report being
circulated, and thus imply that a very real potential, a final
agreement to the bailout meetings on Friday, was not a consideration.
They say they feared the leak would increase the rate of withdrawals
leaving WaMu that Friday. This has to have been one of the most
valuable leaked reports in American history and one wonders if those
who benefited so handsomely from it may have also behind it. As a
further deflection, although a loan swap had been sold to everyone as
the bailout all along, the Treasury pulled a surprise on everyone
after the bailout was passed and did a preferred stock purchasing plan
instead. Was this to distance themselves from the WaMu take down and
modus operandi behind it?

JP Morgan Chase had at least three weeks to prepare their bid, during
which time they had at least seventy-five of their own people
crunching numbers and working forecasts, using the data WaMu had
supplied to the FDIC under the understanding that the FDIC would help
them facilitate a buy-out merger transaction. Bids were submitted on
the 23rd and the FDIC notified JPMorgan Chase they had the winning bid
on the same day. The $1.9 billion was paid to the FDIC, who say it
will be used to toward paying off the debt holders.

J.P. Morgan becomes the country’s largest bank by deposits, with more
than $900 billion in deposits, and second largest overall. They added
WaMu's 2,239 branches in 15 states, many in key states where they had
little or no presence, like California, Oregon, Washington and Florida
and becoming stronger in states where they were low and mid level
players, like Texas, Colorado, Utah and Illinois.

J.P. Morgan acquired all of the assets, all of the bank branches, and
all of the deposits of Washington Mutual Bank and nothing of the
holding company’s Washington Mutual Inc. Washington Mutual Inc
retained only the senior unsecured debt, subordinated unsecured debt,
and preferred and common stock. Due to the seizure, the next day
Friday September 26th Washington Mutual Inc filed for Chapter 11
bankruptcy, a reorganization, and listed assets of $32.9 billion, and
total debt of $8.2 billion. Most of the assets were shares of the
seized bank valued at the preseizure price.

A little needs to be said about bank deposits. To a bank, bank
deposits are a liability because the bank owes the money, plus the
interest promised, back to the depositor. This is obviously true. What
needs to be considered is that the banking system is based on
fractional reserves. When a bank receives a thousand dollars in
deposits it gets to lend out, most of the money, at a higher interest
rate than it pays depositors. In the USA the reserve requirement is
about 10% (10.3% actually). The bank receives say a thousand dollars,
promises 2.5% on it, loans out $900 and receives 7.5% on it, and keeps
the difference. If money the bank has loaned out, is redeposited back
into the bank, they can repeat the process with that deposit. Banks
make good money off of the deposits. Banks do a lot of advertising and
customer service benefits to get people to deposit money at their
bank. It is a slow trudging process to build up a banks depository
base. When JPMorgan Chase received $188 billion in WaMu deposits, the
amount of deposits on the date of seizure, for a $1.9 billion payment,
plus all the WaMu assets, it was a huge steal of a deal. Now consider
that to build deposits a bank has to be located in areas convenient to
entice depositors to deposit with them. The bank needs a branch
network. This is a costly, slow to build, trial and error system that
generally takes years and decades to create. It is a highly valuable
asset. JPMorgan Chase also got all of the WaMu bank branch system as
part of the deal. Also as part of the deal they got to write off all
the bad loans they felt WaMu had on its books, $30.7 billion was the
figure they agreed to. JPMorgan also got WaMu's two credit card
companies, one WaMu had long maintained, and Providian a leading
credit card issuer purchased by Washington Mutual for approximately
$6.5 billion in October 2005. So JPMorgan's risks were all washed away
and their benefits were enormous, and they paid a measly $1.9 billion
for the whole deal. It was the WaMu investors who paid for this deal,
by receiving nothing for their bank's deposits, loan portfolio, real
estate, branch network, and credit card businesses, a total robbery.

The mortgage assets JP Morgan acquired were $176 billion of WaMu’s
home loans. Those assets were immediately written down by 19%, or
$30.7 billion. Leaving JPMorgan with a cool $145 billion dollars of
good assets, some that are eligible for the bailout plan, for which
they paid less than $2 billion dollars, and this does not include the
real estate and other assets. Much of the real estate was actually
owned by WMI and was seized and sold illegally. The only liabilities
they took were the deposits. A few weeks after the dust settled from
the seizure it was revealed that WaMu Inc., the holding company, had
$4.4 billion dollars in accounts in the WaMu bank. The FDIC tried to
claim this money in court as part of their receivership, but the
courts ruled it belongs to WaMu Inc. If WaMu Inc, the holding company,
had been invited to the secret private auction, and bid the balance of
just these accounts, as most people think they gladly would have, they
would have won and beaten JPMorgan's bid by more than two times.

JP Morgan expects the deal to generate $12 billion dollars over the
next three years, or $4 billion dollars a year, making them a 100%
profit on the deal in the first year, and an additional 200% profit
every year from then on. Thus the increase in earnings per share will
be immediate and is expected to be between $0.50 and $0.70 a year,
starting in 2009 and every year thereafter. The owners of the company,
the Washington Mutual Inc shareholders, received zero dollars on their
shares, and they now trade at around three cents. They had their
primary asset preemptively confiscated and sold, for less than two
cents on the dollar, which they do not even receive, for the so called
reason that it suffered occasional short term liquidity problems and
those whose duty it was to help them out with liquidity problems
didn’t want to, and the FDIC that guaranteed some of its liabilities
didn’t want to take the extremely unlikely and extremely short-term
and extremely slight risk that they may need to pay on their
guarantees should WaMu actually not be able meet withdrawals before
possible benefits from the bailout began and/or a buyer was found and
the bank sold off at a fair value. Though simply giving WaMu
depositors a temporary increase in FDIC insurance coverage would have
been all that was needed to remove this one highly unlikely potential
problem. Unless of course they felt some extremely powerful outside
force could precipitate this problem. The bailout which at the time
was about to be passed in the forth coming week, maybe even the next
day, would have possibly eliminated this problem, and the mere
completion of the bailout would have cleared away the final unknowns
in the way of a buyout merger. Although in reality the buyout option
had already been secretly sabotaged and ruined by the FDIC's secret
auction agreements, leaving them no choice but to finish with seizing
the bank and it would look a lot better done before the bailout was
passed. The liquidity problem would have taken weeks or even months to
occur even without a bailout and only if the worst happened or a media
campaign was done, and WaMu remained abandoned. Yet because of a news
leak the OTS justified seizing WaMu immediately before the bailout
passed. The seizure and its timing also hugely benefited the brazen
uncovered shorts, whomever they were. Washington Mutual Inc and its
shareholders were set-up by WaMu's family and friends and then robbed
and murdered by them. The whole WaMu take down was accomplished by
subterfuge, sabotage, deceit, propaganda, lies, illegitimate seizure,
done irregularly, on the sly, in secret, in darkness, under camouflage
of smoke and mirrors, on leaked news, and ended solely to the
financial advantage of the FDIC, the Treasury Dept, the Federal
Reserve/JPMorgan Chase, the uncovered shorts, and those rich enough to
keep over $100,000 in their bank accounts. WaMu shareholders were
totally wiped out. It was a thirty billion dollar rip off.

To add insult to injury after EESA 2008 was made law on October 3rd
2008 JPMorgan Chase became one of nine banks to receive money from the
EESA funds in exchange for preferred shares created especially for
this purpose. On October 14th JPMorgan Chase received $25 billion from
the EESA funds. In effect the government paid back JPMorgan Chase for
taking WaMu and then paid them a $23 billion bonus for doing it, on
top of all the write offs. WaMu would not have even needed $23 billion
in mortgage guarantees to be effortlessly merged and preserving the
shareholders and bond holders investments and the soundness and thus
confidence in the US financial system. It was a tragic move by the
FDIC.

For those who say WaMu made bad loans and so the deserved to be taken
down, it isn't true. WaMu's bad loan rate was 3.62%, that is not
enough to justify the trillions of dollars sucked out of the economy
by the WaMu catastrophe. Further more JPMorgan Chase is drowning in
bad derivative trades, far more than WaMu's bad home loans. It is more
moral to make a bad home loan, which leaves a house and a place for
someone to live, then it is to lose even more billions in bad
derivative trades which leave nothing but worthless paper. WaMu
deserved government assistance more than JPMorgan Chase.

For another perspective on WaMu consider that IndyMac, a bank about
10% WaMu's size, was seized and later sold for $13.9 billion. Wachovia
Bank which the FDIC threatened to seize and tried to force into a sale
to Citigroup for $2.1 billion, almost the same price as JPMorgan paid
for WaMu, was sold within a week to Wells Fargo without any government
assistance for $15.4 billion. There were details to these sales, and
there were considerations, but WaMu was easily as viable as either of
them, and with a little financial finesse, seized or not, could have
easily been sold for considerably more as well.