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Run on Bank Helped Kill WaMu, But Your Money Is Safe

Posted Sep 26, 2008 10:44am EDT by Aaron Task in Investing, Recession, Banking
Related: WM, JPM, XLF, WB, ^DJI, ^GSPC

In the biggest bank failure in U.S. history, the Federal Deposit Insurance Co. seized Washington Mutual's assets Thursday. The FDIC then quickly sold most of WaMu  (that's assets and liabilities) to JPMorgan.

Simply put, WaMu was victimized by a classic "run on the bank." Customers withdrew $16.7 billion in a 10-day period following the bankruptcy of Lehman Brothers, leaving WaMu "with insufficient liquidity to meet its obligations," its regulators determined.

A longer explanation is WaMu was victimized by mismanagement and misguided bets on exotic (and toxic) instruments such as option adjustable-rate mortgages.

The deal has major ramifications for JPMorgan and the banking industry as a whole, as Henry and I discuss in a forthcoming segment.

For the vast majority of people who bank at WaMu, which had 2200 branches and $188.3 billion of deposits as of June 30, the important thing to remember is your deposits are insured up to $100,000, and the Federal government will go to every extreme to make sure it's available.

"There will be no interruption in services and bank customers should expect business as usual come Friday morning," FDIC Chairman Sheila Bair told reporters last night.

The sobering truth, however, is that repeated declarations about the sanctity of FDIC insurance from Bair, President Bush, Treasury Secretary Paulson, Fed Chairman Bernanke and others failed to quell concerns among WaMu's customers. That suggests more "bank runs" could be in the offing unless the government moves quickly to restore confidence.

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