Confidence in US
Banks Nosedives after Washington Mutual Collapse
JP Morgan's buyout of leading lender causes high street anxiety
to reach panic levels
By Andrew Clark
Guardian" The failure of the
Seattle-based bank Washington Mutual undermined confidence in a
fresh clutch of US household names today, as investors digested
the implications of the biggest collapse of a high-street bank
Washington Mutual, which was
bought by JP Morgan after being seized by the US authorities
late yesterday, had a stockpile of controversial "option ARM"
mortgages which allow borrowers multiple options in setting the
level of their own repayments.
These flexible loans, which were
popular at the height of the housing boom, have proven to be
huge liabilities for banks, and other firms known to hold them
saw their stock prices plummet today.
Wachovia, a national chain with
3,000 branches and assets of $812bn (£441bn), saw its shares
dive by 21% during early trading in New York, while National
City Corporation, a regional bank based in Ohio, suffered a
sell-off which pushed its stock down by 27%.
Details emerged of the extent of
a run on the assets of Washington Mutual, known as WaMu, in the
days leading up to its demise. The Office of Thrift Supervision
said customers withdrew $16.7bn of deposits in 10 days,
beginning on September 15 - the day Lehman Brothers declared
itself bankrupt, sparking a crisis of confidence in the broader
Sheila Bair, chairman of the
Federal Deposit Insurance Corporation, said the outflow alarmed
WaMu's creditors, who became increasingly reluctant to extend
funds. "Those who were willing to lend to them were no longer
willing to do so," she said.
The FDIC reassured customers
that all their money was safe. But it was clear that JP Morgan's
offer to buy the Seattle bank's assets was a profound relief to
regulators as America's insurance fund for banking deposits
would have struggled to meet the bill - potentially requiring
taxpayers to pick up any shortfall.
"We were fortunate - this is
huge," said Bair. "We've protected taxpayers, we've protected
depositors and we've protected the deposit insurance fund."
Last month, the FDIC said it had
a "watch list" of 117 potentially troubled banks, holding a
total of $78bn in assets. Bair said the list, which is updated
quarterly, was growing as the financial crisis deepened.
WaMu's senior executives were
caught on the hop when their firm was seized by the Office of
Thrift Supervision. At the moment of the seizure, much of WaMu's
leadership team was on a plane from New York to Seattle.
The bank's failure could
generate a fresh outbreak of fury over executive compensation.
WaMu's chief executive, Alan Fishman, joined the bank only three
weeks ago from a rival, Sovereign Bank. He received a $7.5m
signing-on bonus and could be eligible for $11.6m in severance
WaMu has its roots in a savings
association created to help Seattle residents rebuild after the
city suffered a catastrophic fire in 1889. The bank has 2,239
branches across the US and employs 43,000 people. It is widely
known for its television jingles which celebrate the bank's
nickname, WaMu, with chants of "woo-hoo". In Seattle, there was
gloom about the firm's demise.
"It's devastating" Steve Leahy,
chairman of the city's chamber of commerce, told the Seattle
Post-Intelligencer newspaper. "They've been here since the
Seattle fire. The suddenness of all this, it's just taking our
JP Morgan's decision to ride to
WaMu's rescue was the second time this year that it has snapped
up the assets of a troubled rival. Aided by a Federal Reserve
guarantee, JP Morgan bought Bear Stearns when it was on the
brink of bankruptcy in March.
Financial historians pointed to
a proud history at JP Morgan of acting to avert crisis. The
bank's founder, John Pierpont Morgan, was credited with bringing
together Wall Street bankers to come up with a rescue package to
prop up failing finance houses at the height of a stockmarket
panic in 1907. The bill was substantially lower in those days -
federal authorities contributed $35m, compared to the $700bn
industry-wide bail-out package under negotiation this week.
As the banking crisis continues
to develop, recriminations are underway at regulatory
authorities. The Securities and Exchange Commission was accused
of performing only "sporadic and random" oversight of Wall
Street broker-dealers in a report sent to Congress by its own
inspector general today.
The report, which focuses on the
demise of Bear Stearns, said the SEC's oversight arm was "not
fulfilling its obligations" in reviewing the accounts of Wall
Street's top financial institutions, hindering the ability to
foresee weaknesses in the markets.
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