The Week of More Tectonic Shifts In Industry

Bank Bailout Talks, WaMu and What It Means
The Week of More Tectonic Shifts In Industry
As the debate continues to roil in Washington over how the $700 billion bank bailout will finally look, the banking industry today felt another tectonic shift in the wake of the nation's most momentous financial crisis since the Great Depression as JP Morgan Chase acquired Washington Mutual yesterday in a $1.9 billion deal.

WaMu's failure far surpassed IndyMac's failure earlier in August, and it was the Office of Thrift Supervision's largest supervised bank at $307 billion in assets. JP Morgan Chase's buyout of WaMu now makes it the second largest bank in the U.S. after Bank of America.

The silver lining in JP Morgan Chase's acquisition of WaMu means that the thrift's failure won't take money from the FDIC's insurance fund. The FDIC faced down a speculative story from Bloomberg News on the viability of its Deposit Insurance Fund on Thursday when it responded with an open letter to the news site rebutting the coverage that called into question the insurance fund. "No depositor has ever lost a penny of insured deposits, and never will," says Andrew Gray, of the FDIC's public relations office in the letter.

Gray points to the fact that if needed, the FDIC has longstanding lines of credit with the Treasury Department. "Congress, understanding the need to ensure that working capital is available to the FDIC to provide bridge funding between the time a bank fails and when its assets are sold, provided broad authority for us to borrow from Treasury's Federal Financing Bank."

The Wall Street bailout along with the WaMu failure comes after a flurry of events in the past weeks that saw the government takeover of Fannie Mae and Freddie Mac, Bank of America buying Merrill Lynch, and Lehman Brothers Holdings Inc. declaring bankruptcy and American International Group Inc., the world's largest insurer, getting taken over by the government in an $85 billion loan to support the company.

Bailout Talks Turn South

In what is seen as a revolt against their party's leader, a group of House Republicans brought their own plan on how the $700 billion bailout should include mortgage holders and homeowners on Thursday night's meeting at the White House.

The chairman of the House Financial Services Committee said today an agreement on legislation to relieve a spreading financial crisis depends on whether those House Republicans would stop pushing for their plan to be considered. Both parties had previously said that broad outlines of an agreement had been ok'd to go ahead with the Treasury's proposed $700 billion bailout plan.

The Republican House members propose that instead of the government buying the distressed securities, their plan would have banks, financial firms and other investors that hold such loans pay the Treasury to insure them. Lawmakers vowed that Bush's plan would not pass a House vote.

American legislators have a case of "bail out fever" and shouldn't rush to judgment says William M. Isaac, former FDIC chairman from 1981-1985. Isaac's take is that stepping back and letting the FDIC handle these failures is one option that hasn't been considered. The FDIC handled thousands of bank failures during the Savings and Loan crisis in the late 1980s and early 1990s and Isaac says it is possible that the FDIC should be considered for this job as well.

"One rationale I have heard for acting immediately on the $700 billion bailout is that bank depositors are getting panicky - mostly in reaction to the failure of IndyMac in which uninsured depositors were exposed to loss, says Isaac."

He asks if this fear means that the government needs to enact an emergency program to purchase $700 billion of real estate loans? "If the problem is depositor confidence, perhaps we need to be clearer about the fact that the FDIC fund is backed by the full faith and credit of the government."

If stronger action is needed, he says, the FDIC should announce that it will handle all bank failures, except those involving significant fraudulent activities, as assisted mergers that will protect all depositors and other general creditors. "The FDIC should do this in the current climate anyway, so why not announce it as a temporary program and calm depositors?" Isaac asks. The banks do not need taxpayers to carry their loans, they need proper accounting and regulatory policies that will allow them time to work through their problems, he concludes.

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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