The Road to Failure of Washington Mutual

The largest United States savings and loan bank ever to fail is Seattle based Washington Mutual. Washington Mutual also at one point was one of the largest mortgage lenders in the country, this eventually lead to its downfall. A savings and loan bank is one that focuses on savings deposits and mortgages, this is also known as a thrift bank. Washington Mutual or WaMu as it is know has been a bank since 1889 which is the same year that Washington was officially recognized as a state. Before its collapse, WaMu was the sixth largest bank in the United States with 328 billion dollars in assets.

Washington Mutual's downfall started several years ago during the housing boom and the beginning of the sub-prime mortgage crisis. Washington Mutual invested heavily in sub-prime mortgages and they were hurt very badly when people were unable to pay their mortgage. Many of these mortgages included low introductory rates that allowed people to take mortgages that they couldn't really afford with the normal payments. After a year or so the introductory rate would change to the normal rate and sub-prime mortgage takers where unable to keep up and pay. This caused them to default and the bank to take back the house, once this happened the bank would then try to sell the house to get back some of their money. Unfortunately this happened so often that the price of houses was driven down and banks could not get all of their money back. This was the main factor for the collapse of Washington Mutual but there were other things that contributed.

Washington Mutual's stock dropped 85% this year when news of how bad the mortgage crisis was started to surface. This coupled along with the fact that Washington Mutual's investments in mortgages were worth nothing caused the bank to lose liquidity or the ability to have cash on hand for account holders to with draw money. Washington Mutual first tried to fix this problem by creating a CD or Certificate of Deposit with an interest rate of 5% which was twice the national average. A CD works by having someone put money into one and they are locked in for a set amount of time, usually a year, in which they can not access the money. In return banks offer higher interests rates than normal savings accounts since they are able to hold on to the money for longer and allowing themselves to become more liquid. Unfortunately in the case of WaMu, this was too little too late and there were not able to rescue themselves. In a ten day span Washington Mutual lost $16.7 billion dollars in deposits because account holders become worried about the banks future and they withdrew money. This caused an extreme liquidity problem that force regulators and the FDIC or Federal Deposit Insurance Corporation to seize the bank and all of its deposits. The main responsibility of the FDIC is to make sure that people's money in bank account is safe and insured in cases of a banks collapse. The FDIC was formed after the Great Depression of the 1920's that devastated the entire United States. With Washington Mutual no longer owning their banking operations, there were forced to file for Chapter 11 bankruptcy with $8 billion dollars in debt.

The FDIC then brokered a deal with financial giant JP Morgan Chase to sell the bank for only $1.9 billion dollars. JP Morgan Chase then reopened the bank the next day. JP Morgan Chase had been eyeing Washington Mutual for a while with an offer to buy them out for $7 a share earlier this year. JP Morgan Chase hoped to expand its banking to the west coast and with the purchase of Washington Mutual's 2,239 banks they are now able to do that.

There are several keys things that the management of Washington Mutual could have done to prevent its demise. The most important of these things is to not have given people mortgages that they knew they could never repay. WaMu was just being greedy and not thinking about their future or the future of the economy when they signed these people up for these mortgages. By not having all these bad mortgages WaMu would not have been stuck with worthless investments and they would have been able to be a lot more liquid and have more money on had. The mortgage crisis is what caused the stock to fall 85% in value which in turned caused people to lose faith in WaMu and withdraw their money. Another thing that could have been done if the mortgage could not have been stopped or fixed was to accept the offer from JP Morgan Chase earlier in the year to be bought out. This way Chase would have been stuck with all of the bad investments and problems and Washington Mutual would have been unharmed since they would have no longer existed.

The impact of the failure of Washington Mutual is huge especially here in Washington since this is where they were based. Many local people will now lose their jobs because of the failure and many others will be unsure of their future. Also Washington Mutual had a huge charity foundation that donated around $50 million dollars per year to local organizations. Now with the company gone, these organizations will no longer get the money that they need. Also the failure of WaMu directly affects me since I had a savings and checking account at that bank. Although I know that my money is safe because of the FDIC, I still am worried about the future and if any where is safe to put my savings.

Sources:

http://seattletimes.nwsource.com/html/businesstechnology/2008204758_wamu26.html

http://afp.google.com/article/ALeqM5jUVXKSPKXdaP2lKgTZJsHPa6x3OQ

http://www.nytimes.com/2008/10/08/realestate/commercial/08branch.html?ref=business

http://www.fool.com/investing/dividends-income/2008/09/30/the-beauty-of-washington-mutuals-collapse.aspx