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Whoo Hoo: Washington Mutual Next to Fail?

This article was written by in Banking. 10 comments.


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.

Washington MutualIt’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.

Photo: P.C. Loadletter
Washington Mutual Stock Falls on Investor Fears, Eric Dash and Geraldine Fabrikant, The New York Times, September 10, 2008

Updated January 16, 2010 and originally published September 11, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 10 comments… read them below or add one }

avatar Jennson

does this mean I don’t have to pay my credit card bill to WaMu? hahahaha

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avatar Ami

We have our home mortgage with WaMu. We have it at a very good rate for about 6 years now. We have never paid late or have had any issues regarding payments or mortgage terms. What happens to our mortgage in case the bank folds down? Do we lose the rate that we have? Is the mortgage or our home at risk ?
Any suggestions would help.

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avatar savvy

Hmm, I have a business checking account with WaMu. Seems like it might be time for me to start looking for another bank…

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avatar Llama Money

Amy: Your mortgage doesn’t go away, nor do the terms change. It’s doubtful that WAMU actually “owns” your mortgage anyway – they probably just service it. Another bank will purchase the rights to service your loan, and you will send your payments in to the new bank. Just a different name and address on your mortgage checks – no worries at all.

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avatar CJ

I say, let them fail. Banks need to learn to not write bad loans. People need to learn not to take on more debt than they can handle. Let em all burn!

OK, so maybe not that extreme, but seriously, if people just worked to pay cash for everything rather than using “someone else’s money” then we wouldn’t be having this problem. But we’re too greedy and it’s biting us in the foot.

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avatar Jm

Wow what pessimism wamu has done nothing wrong this week other than firing a ceo and they act like its the end…oh well

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avatar purpelnoon

I just opened a CD two weeks ago with WAMU. They offered 5% Yield, much higher than any bank around. I figured its FDIC insured so I will take the risk to get the higher payout. The term is for one year. I do hope I made the right decision and that this doesn’t become a nightmare for me.

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avatar Donna

This is simply terrifying to contemplate, but I find there is some food for thought in one aspect of all of this: the size of WaMu and the capability of the FDIC. The FDIC was established at a time when there were regulations about how large one bank could get. Those restrictions were eliminated in the ’80′s and ’90′s, but I don’t think any changes were made with the FDIC to be able to handle supersized banks. (I could be wrong.) This bank is so large, we’re facing bringing our currency to the brink of destruction to be able to guarantee deposits. Am I the only one who is shaking in my shoes at this prospect? Were the banking regulations put into place during the Great Depression that we got rid of in the last 20 years wiser than we ever realized? I’m not an economic historian, but I’ve got a bad feeling that we set ourselves up for this by forgetting lessons learned with the bank failures of the 1930′s.

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avatar Julie

With so many banks failing it makes me happy to be working for ShoreBank, one that has had a solid business plan for the last 35 years, and is doing well. I think part of the reason for our success is that solid business plan, we do things like help entrepreneurs invest in their local community and create economic incentives for environmental conscience:

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avatar kurt

Yeah, I think WaMu is next, probably within the next week, we will here something, particularly since BofA just bought Merrill.

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