The WaMu Story
Economic Environment Surrounding the Seizure.
The seizure of WMB was preceded by months of generalized anxiety across the financial markets and weeks of financial turmoil. Commonly attributed to deterioration in the housing market in 2006, the decreasing financial condition of the US economy prompted the government-backed sale of Bear Stearns to JPMorgan in March , the closure of IndyMac by the OTS in July , and the placement of both Fannie Mae and Freddie Mac into conservatorship in the first week of September.
The week of September 15th, the financial turmoil began to develop into a crisis. During the previous weekend, Federal Reserve and Treasury officials had concluded that the investment bank of “Lehman Brothers was probably insolvent”.
Treasury secretary Henry Paulson was concerned with “moral hazard”, or the thought that companies would take too many risks if the government were to bail them out. Based on this decision, buyout negotiations involving Lehman Brothers were suspended, and the company was forced to seek Chapter 11 bankruptcy protection.
As a consequence of this filing, the Reserve Primary Fund money market fund encountered “a wave of redemptions”.
On the following day, September 16th, the Federal Reserve loaned AIG $85 billion to support the troubled insurer while the Reserve Primary Fund, due to a wave of redemptions worried about their Lehman exposure, was forced to break the buck with the price of its shares.
These two events seemingly exacerbated the developing financial crisis as investors shifted money market assets from funds backed by commercial loans to funds backed by treasuries and other government bonds, creating liquidity problems for institutions that dealt with commercial paper and increasing overnight borrowing costs.
On September 18th, talks began in Washington on the details of a 700 billion financial bailout plan.
Additionally, institutional money managers reportedly sought to “redeem another $500 billion” from money market funds, but only redeemed 105 billion after Secretary Paulson intervened.
This was followed on September 19th with the Treasury announcing a program to guarantee $1.00/share of participating money market funds.
It was in this environment of generalized financial panic,
ever-decreasing credit markets, and heated political debate over the
proposed bailout legislation that Washington Mutual Bank was seized
by the OTS on September 25th.
Federal Reserve and Treasury officials conclude that “Lehman Brothers was probably insolvent.”
Lehman Brothers Holdings Inc. files for bankruptcy
Bank of America acquires Merrill Lynch after failed negotiations to buy Lehman Brothers due to Federal Reserve and Treasury making “it clear that the federal government would not assist any buyers of Lehman Brothers.”
Reserve Primary Fund money market mutual fund is hit with “a wave of redemptions” due to Lehman exposure.
“For the week ending on Wednesday September 17, 2008, investors reportedly redeemed $145 billion from their money market mutual funds.”
Investors begin to shift from money market funds backed by commercial loans to funds backed by treasuries and other government bonds, creating liquidity problems for institutions that deal with commercial paper and increasing overnight borrowing costs.
Bernanke reports that “[t]he resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs.”
Talks begin in Washington on a financial bailout plan. Institutional money managers reportedly seek to “redeem another $500 billion” from money market funds, but only redeem 105 billion after Secretary Paulson intervenes.
Bernanke and Paulson begin discussing proposal for 700 billion bailout plan with congressional leaders.