The Death Parade of Giants

Wachovia's turn. Citigroup has just announced it will be cherry picking Wachovia's banking division. I doubt anybody is going to touch the rest of it. We see here again the FDIC's new business model: seize a bank, hand the assets over to a more solvent bank practically for free ($2.2 billion; a pitance considering the value of the retail outlets and deposits), and then declare bankruptcy on what is left. Previous regulatory efforts screwed shareholders but protected bond holders. These latest actions give both the shaft. Depositors are protected, even those with more than $100,000 in an account. WaMu held the record of being the largest bank failure in U.S. history for all of four days. Almost certainly Wachovia will dwarf that.

This marks the second collapse of a bank where I had deposits. My thinking was, the bigger they were, the more likely a bailout, and the earlier this happens in the process, the more systemic capacitance there will be to rescue deposits.

ADDENDUM [10/3/08]: It appears bond holders weren't left to rot, not totally, anyway. As part of the deal the FDIC had agreed to absorb up to $42 billion in bad loans. Today it is up in the air as to whether Citigroup will be acquiring Wachovia with is arrangement, or that Wells Fargo will arrange a private buyout, where bad debt would be shifted over instead to the congressional bailout plan that may be passed later today.

CORRECTION [10/15/08]: So, I guess the word is that Wachovia was not technically a bank failure; but rather was bought out by Wells Fargo (and the tax base who will be covering Wachovia's toxic debt). So, Washington Mutual retains the crown as the largest bank failure to date.

Uh Oh....

This uptick on the base money supply is worrisome and if not a random artifact of the financial turmoil and indicative of a trend it could spell concerns for the value of the dollar. It will be followed here. That said, there are so many deflationary events in play that an expansion of the base money supply was to be expected and will not necessarily mean the dollar is about to tank.

Goodbye WaMu, I Hardly Knew Ye

When JP Morgan acquired Bear Stearns with $44 billion in federal backing, that is what broke the camels back: truth be told that was the spark that started this blog. I hope to squeeze in a retrospective on Bear Stearns one day.

Today, federal regulators seized Washington Mutual and handed operations over to JP Morgan for a firesale $1.9 billion, with an agreement that JP Morgan would raise another $8 billion through stock sales. Reportedly, this marks the biggest bank failure in U.S history (though I don't know about the "stunning twist" remark).

I feel safe now about my little money market fund in WaMu; it's been taken over by a power hitter even among the financial giants.

ADDENDUM [9/27/08]: So... it doesn't look like WaMu was exactly bought out by JP Morgan. It was seized by the FDIC, its assets were handed over to JPM, and now it is filing for bankruptcy such that its debt will be defaulted on.

Goldman Sachs, Morgan Stanley Accepting Deposits

Goldman Sachs (GS) and Morgan Stanley (MS) have shifted from pure investment banking, and now seek traditional deposits. In a sense it is news as this marks an end to investment banking on Wall Street. This article suggests they will be buying deposits from banks taken over by the FDIC.

Mortgage Bailout Bill, Part 2

A more expansive bailout proposal than the last one is making its way through congress, and will no doubt be signed in to law. The key feature is that is authorizes the Treasury to buy up to $700 billion in toxic mortgage securities. Now the prior bailout bill had two major parts to it; one was a mortgage rescue proposal that assisted conversion of adjustable loans to fixed rate at the current price of the house minus 10%; and the other part authorized the conservatorship of Fannie Mae and Freddie Mac such that the Treasury Department could purchase unlimited mortgage securities with T-Bills. If one good thing can be said of this bill it limits such purchases—to $700 billion dollars. At least there is a price on it. But I'm sure that will be expanded as necessary.

This current bill dispenses with any pretense of helping the American citizenry and is squarely a bailout of the banks. The only justification made is to expect really really scary things to happen if it doesn't pass. This is all congruent with my prediction earlier that the shape of the banking bailout would be the Treasury department exchanging T-Bills for problematic mortgage securities. If banks can chuck mortgages so easily one wonders how motivated they will be to participate in the rescue part of the first bill.

Anyway, this bill isn't passed yet so discussion of the details will wait until then.

Thank You For Not Shorting

Okay, it was kind of funny when the SEC put restrictions on "naked" shorting for a few select financial institutions, but now it looks like they are trying to put an end to nearly all shorting of the finance industry to maintain a government mandated artificial elevation of asset prices—and this is just getting annoying. Today, Wall Street has become a fine example of a socialist economy.

ADDENDUM [10/1/08]: The ban on shorting was extended today by the SEC until October 17.

UPDATE [1/4/09]: In a nice validation, Cox, chairman of the SEC, expressed regrets over the shorting policy, and admits that on reviewing the data it had unintented consequences. Faced with similar circumstances he says he would not be inclined to repeat the action again.

UPDATE [3/26/09]: Recently, limits have been placed on shorting on down ticks, but you can still short on up ticks. Oh brother!

I'm Getting a Bailout

For probably similar reasons that people bungee jump and eat puffer fish, through all of this I've been keeping a money market account at Washington Mutual. It's a small fraction of the savings I have, but the amount is not trivial either. The branch is right down the street from me, so I went there asking for an FDIC-insured CD, but they pushed a money market on me instead—showing me CD rates that were close to a half a percent and a money market rate closer to 3%. Suspicious, I querried about the possibility of losing money but they insisted everything was insured and it was no different than a CD, and could pull out my money whenever I wanted. So I bit. It's been working out fine, except one time after making a deposit two or three weeks ago the teller machine refused to let me make a withdrawal.

Without an exhaustive bailout everybody knows Washington Mutual is teetering on a seizure by the FDIC, which doesn't worry me particularly. I figure a bank going down sooner in this mess is better than one going down later. Still, without the sudden and rather unexpected passage today by congress of a $50 billion "backstop" for institutional money market funds, I'm wondering if I might have lost some money in all this.