Shares in Washington Mutual, the country’s largest savings and loan bank, dropped over 30% in one day due to fears that this institution will be the next in a series of failures of financial companies. WaMu holds $310 billion in assets, a huge amount of deposits. The FDIC, which might step in to take over the bank, has only $53 billion set aside to assist customers when their banks collapse.
There are a few scenarios. A larger domestic or foreign bank could step in to take over all or part of Washington Mutual. This would be a risky move for the acquiring bank, however, thanks to about WaMu’s $180 billion tied into mortgage-related loans and expectations of massive losses this year.
If the FDIC steps in, it won’t be able to cover all deposits with reserves. Perhaps it’s possible for a combination acquisition of WaMu by FDIC and a private bank. Private equity firms could also infuse capital into the company, but this is another risky choice for equity investors.
It’s more likely that, if necessary, Washington Mutual will be taken over by FDIC, and any shortfall in deposits will be assisted by the U.S. Treasury printing more money. This increase in the money supply would allow WaMu’s customers to withdraw their accounts in full when needed, but the real value of that money — and the value of the money held by anyone who saves or invest using the U.S. dollar — will be less. How much less? That remains to be seen.
I do not have any money in Washington Mutual. I’ve considered opening a savings account thanks to the high interest rates they’ve offered recently, but my earlier laziness may have saved me stress today.
While in most circumstances your money held at a bank insured by the FDIC is safe, when the industry is in crisis with a string of failures, it makes sense to play a little safer than usual. I intend on always keeping my savings accounts within the FDIC limits. While I once considered simplifying my finances by reducing the number of banks in which I hold accounts, it may make more sense to diversify among a number of banks and credit unions.
Updated January 16, 2010 and originally published September 11, 2008.