The demise of WaMu was the biggest bank failure in US History. Nearly 10 per cent of its retail deposits were withdrawn in the lead-up to the failure (mostly deposits that were above the FDIC’s insurance limit). Talk about shorting banks leading to a fall in confidence? These days we make a pretty definite statement when we take our savings elsewhere. It may be a self-fulfilling prophecy but nobody wants to be the last one off the sinking ship.
The failure wiped out shareholders in the bank. JP Morgan Chase didn’t take on the holding company’s debts, just the juicy bits that were worth keeping. In fact, why would anybody come to the rescue of a bank now in the knowledge that they will be able to buy up the assets cheap after the bank goes into administration? The best bits of WaMu were sold to JP Morgan for $1.9 billion. WaMu was valued at over $30 billion a year before its collapse so that’s a pretty good bargain!
So who’s next to go to the wall? Looks like Wachovia. The sixth largest US bank saw its shares plummet 27% on Friday and is looking for buyers. The struggling bank has $122 billion of distressed debts so it’s difficult to see who would want to come in and save it rather than wait for it to go to the wall and come in afterwards to pick up a bargain.