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Quote of the Day
The past is never dead. It’s not even past.
William Faulkner – From Requiem for a Nun, Act 1, Scene 3,
September 25th – This Day in Stock Market History
September 25, 2008 — Washington Mutual and the bailout package unravel afterhours
As the 2008 crisis spirals, this day marks the the largest bank failure in the history of the United States by assets, at $307 billion, more than seven times the previous record, Continental Illinois’s $40 billion in 1984, and larger than every failure of 2009 and 2010 combined.
We have much more detail on the Washington Mutual Collapse on tomorrow’s page.
This day also marks the unraveling of an anticipated bailout package that was sought to strengthen investor confidence as the financial system fell apart.
Most of the excitement did not happen until after the market closed for the day. The Dow rose 196.89 points on the Thursday, 1.82 percent, to 11,022.06, on the early-afternoon reports that the congressional negotiators had reached what Senator Dodd called a “fundamental agreement” on the Treasury’s bailout plan.
Washington Mutual’s own shares initially jumped on buyout rumors with private equity firms but fell sharply when those prospects faded, closing at $1.69.
At 4:03 p.m. the President opened the Cabinet Room meeting — Paulson, Bernanke’s deputy, the four congressional leaders, the chairmen and ranking members of the banking committees, and Senators McCain and Obama — with the sentence “We are in a serious economic crisis in the country if we don’t pass a piece of legislation,” and the hope that “we can reach an agreement very shortly”.
They did not. The House Republican leadership announced inside the room that it would not support the plan and offered an alternative built on insurance rather than purchases. The meeting ended in what every participant’s memoir describes as a shouting match; and in the Roosevelt Room afterward the Treasury Secretary went down on one knee before the Speaker of the House, begging her not to withdraw the Democrats’ support.
As this was ongoing, the FDIC was facing its largest test yet.
The collapse of Washington Mutual was only speeding up. The original plan was to take over the business at close the next day (A Friday). But it was becoming apparent that the bank could not survive another day, as 9% of the banks assets were withdrawn the past week alone.
At about nine o’clock that evening the Office of Thrift Supervision closed Washington Mutual Bank.
The FDIC had already run the auction for the bank’s assets: JPMorgan Chase paid $1.9 billion for the deposits, the 2,2007 branches, and the loans, while assuming none of the holding company’s obligations. WaMu’s senior unsecured debt, the subordinated debt, the preferred stock, and the parent stock were left behind worthless.
The FDIC’s insurance fund was not touched, despite the 6th largest bank in the country at the time failing.
Also worth noting: The market saw this collapse happening well before the depositors did. The stock had peaked at $45.91 in 2006; it was under $20 by the end of 2007.
Washington Mutual was, for most of its 119 years, the most boring kind of bank. A simple mutual savings bank based out of Seattle that took deposits and made fixed-rate mortgages on the houses of the people who were the bank’s customers.
It joined the mania late — in 2004, when the subprime and option-ARM machine had been running for years and the prices those loans fetched on Wall Street were at their peak.
By 2006 the option ARMs were something like half of the book. To incentivize the change further – the company was paying its loan officers by volume, and its own internal audits were finding fraud rates in some Long Beach offices above 50 percent.
The details of WaMu’s collapse are in the 650 page report WALL STREET ANDTHE FINANCIAL CRISIS: Anatomy of a Financial Collapse, and also the book The Lost Bank, noted in our Read of the Day below.
September 25, 1857 — the Philadelphia suspension: the Bank of Pennsylvania stops
The “Panic of 1857” continues to spread. From its origination on August 24th, 1857 – one month later the panic was still spreading across the country.
On this day, The Bank of Pennsylvania would stop payment of gold, finally succumbing after weathering a run for several days. The storied bank, founded in 1780, would not recover. The freeze would ultimately ensure that depositors of the bank would be made whole, but only after a long, multi-year wind down period. It prevented the bank’s assets needing to be sold at fire sale prices, but the bank would never be able to operate as normal again.
Other Philadelphia banks would follow suit over the next day. Panic would continue to spread across the country through December.
What the Philadelphia banks did on the Friday was what the Office of Thrift Supervision did to Washington Mutual on this page’s anchor event 151 years later: stop the run by changing who was in charge of the counter. The difference is that in 1857 the banks did it to themselves, under no law, and were indemnified afterward. In 2008 a regulator did it, under a statute, before the bank could open on Friday.
Read of the Day
The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History
On the night of September 25, 2008, federal regulators walked into Washington Mutual and seized it before the bank could open its doors the next morning. The Lost Bank traces how a homegrown Seattle thrift, built over a century into the country’s biggest savings and loan, bet everything on subprime mortgages during the housing boom and then unraveled in a matter of weeks as depositors pulled $16 billion in ten days. Kirsten Grind, the Seattle Times reporter who broke the story, reconstructs the collapse from the inside — the executives who saw it coming, the regulators racing the clock, and the ordinary depositors caught in a run they didn’t start and couldn’t stop.
<– Go To Previous Day: September 24th, 1869: Black Friday as Gould’s Gold Corner Fails
Go To Next Day: September 26th, 2008: Stock’s trade after Washington Mutual’s Seizure by the FDIC –>