Should I close my bank account at Washington Mutual?
Ever since I published my musings last week on my lack of any meaningful sense of connection to the bank that handles my money, ("My Bank is Failing, and I Don't Care"), I have been besieged with queries from friends and e-mail correspondents who also bank with Washington Mutual. They want to know whether it is time to move their money.
The extraordinary developments on Wall Street and in Washington this week have only served to jack up the stakes. The regular appearance of such headlines as "Is Washington Mutual the Next to Fail?" is hardly comforting. And after yet another brutal day for the stock market on Wednesday -- with the Dow Jones Industrial Average dropping 450 points -- stresses on all publicly trading financial corporations will undoubtedly increase.
And yet, I am loath to make it a practice to offer actual financial advice. I may spend most of my waking hours trying to understand what is happening, but I have little confidence in my predictive abilities. Following the financial news of late has been a constant exercise in surprise and astonishment. At the same time it also seems irresponsible to attempt to make sense out of all this chaos and not try to translate what I'm learning into practical steps with respect to my own financial security.
So here is what I think. I believe that the two most likely outcomes to WaMu's travails are that the bank manages to muddle through, or that the Fed forces it into a merger with another bank -- most likely J. P. Morgan Chase. I do not see an AIG-style nationalization or IndyMac-style outright closure.
Here's why. Washington Mutual's deposit base is huge -- around $143 billion worth -- and by its own account, it has access to some $50 billion worth of liquidity. Yes, the bank is losing significant sums of money every quarter, but when Moody's downgraded WaMu's credit rating to "junk" on Friday, the agency also stipulated that WaMu still had access to enough cash, at its current burn rate, to survive until 2010. In the current market climate, that's so far in the future it doesn't even bear worrying about.
I am also sure that the last thing the Treasury or the Federal Reserve want to see happen is for the FDIC to foot the bill for making good on its commitments to WaMu's millions of depositors. That would cost the Federal Government a great deal of money. It would be cheaper, I think, for the Fed to do something similar to what it did with Bear Stearns -- i.e. offer J.P. Morgan Chase some guarantee that the government would assume responsibility for some portion of WaMu's disastrous mortgage-related liabilities, in return for the merger.
In other words, it would be a better deal for taxpayers if the federal government could bail WaMu out by facilitating a merger or buyout, rather than have to shell out hundreds of billions in FDIC obligations. Further supporting this theory is a report from the Associated Press on Wednesday suggesting that regulators are looking for a WaMu buyer.
One might wonder, however, how much persuasive power the federal government has at the moment. Bernanke and Paulson could not convince Goldman Sachs and J.P. Morgan Chase to extend a $75 billion dollar loan to AIG, and they couldn't find anyone to buy Lehman Brothers outright.
But there's a pretty nice carrot to offer a potential WaMu buyer.
Or rather WaMu's extensive chain of retail branches with their huge deposit base. If reports are true that JP Morgan tried to buy WaMu back in the spring, offering around 8 dollars a share, why would it balk now, when WaMu is trading at around two dollars a share?
That's my analysis, at around 1:20 p.m. on the West Coast on Wednesday. It is subject to change at any moment, of course, but given that's how I see it, I'm going to put my money where my blog is and stand pat.
UPDATE: Moments after posting, an alert from the Wall Street Journal:
Washington Mutual Inc. received a critical financial concession from its largest investor, setting the stage for the beleaguered thrift to raise more capital, divest branches or sell the entire thrift, according to people familiar with the situation.
Seattle-based WaMu, weighed down by a deteriorating balance sheet tied to its vast mortgage portfolio, has received interest from Wells Fargo & Co. and Citigroup Inc., these people said.