The Untold Story: How WaMu Execs Fought Government Seizure
By Dan Fitzpatrick
When the Office of Thrift Supervision seized Washington Mutual two years ago this month, it justified the nation’s largest-ever bank failure by saying WaMu was “likely to be unable to pay its obligations” amid a $22 billion, two-month run on deposits and had “no realistic chances for raising new capital.”
A document obtained via a Freedom of Information request shows how forcefully executives resisted these arguments until the very end.
Bloomberg News
JPMorgan bought Washington Mutual in a 2008 fire sale.
WaMu’s outflow of deposits had “moderated substantially” following the September 2008 collapse of Lehman Brothers, wrote CEO Alan Fishman and Chairman Stephen Frank in the September 24, 2008, letter to regulators. One day later, regulators took down WaMu and sold its banking operations to J.P. Morgan for $1.88 billion.
What’s more, the thrift had a plan to create $19 billion more in capital “without a penny of government assistance.”
The letter, WaMu’s last hope of survival after it failed to secure a buyer on its own, was addressed to Federal Reserve Vice Chairman Donald Kohn, Federal Deposit Insurance Corporation Chair Sheila Bair and OTS director John Reich.
The document includes a plea for leniency. A seizure “of a large, well-capitalized U.S. banking organization,” Mr. Fishman and Mr. Frank wrote, “is without precedent in U.S. history and will send a stark message to bank customers and investors. We think there is no reason to take such a dramatic step when our proposal would, quickly and simply, create $19 billion more capital for WaMu and reposition it to easily withstand the current market turmoil – all without a penny of government assistance.”
A WaMu failure, they added, “would represent a further destabilizing event in the financial markets, adversely affecting the deposit bases and share prices of many other financial institutions.”
The bank officials did not deny there was run on deposits following the failure of California lender IndyMac Bank in July 2008 and the Lehman failure. But they argued that the worst of the damage was over.
The “core deposit base” remained “loyal,” with 20 million retail accounts; and more than 41% of WaMu’s “high balance households” had returned at least $10,000 in deposits between July 25 and September 11, they wrote. “Nearly a quarter” brought back more than $100,000.
On September 23, 2008, the day before the letter was sent, WaMu lost $600 million in deposits, a sign of “stabilization,” according to the executives.
Their last-ditch rescue attempt, according to the letter, involved two steps. The first would “immediately” add $4 billion to Washington Mutual’s capital base and $6 billion to its liquidity while requiring “no investor approval.” This likely was a reference to a movement of funds from the holding company to the banking operations, said a person familiar with the situation.
The second step was to purchase WaMu’s preferred stock and debt and exchange it for new preferred shares and common equity, increasing Tier I capital by $13 billion, according to the letter. Together, the two steps would have added “up to $19 billion” to WaMu’s “shareholders’ equity for GAAP and regulatory capital purposes.”
“Our financial advisers believe the exchange offer would have a high likelihood of success and could be fully completed in under six weeks.”
WaMu officials said there were other steps, as well. They could sell higher risk assets to private investors and sell off branches, citing discussions with investors and “at least one international bank” about such moves. WaMu then would be “well positioned to raise additional capital or find a merger partner once market conditions stabilize.”
“We urge you to let us implement this plan. Its completion will produce a recapitalized competitor able to serve the needs of ordinary Americans across the country.”
Bottom Line: WAMUQ: Legalized THEFT of WaMu, sanctioned at the highest levels................
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