On Sept. 25, Washington Mutual, the largest savings and loan bank in the United States, was seized by the Federal Deposit Insurance Corporation and sold to JP Morgan Chase for $1.9 billion. It was the largest single bank failure in American history.
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WaMu’s demise was precipitated by its heavy investment in now-notorious subprime mortgage lending and executive mismanagement of its assets, prompting a year-long loss of 94 percent of share value that led to Standard & Poor’s downgrading of WaMu’s credit rating to junk on Sept. 15. A 10-day run on the bank followed, pushing it toward insolvency and leading directly to FDIC seizure.
Due to its large portfolio of distressed mortgages, WaMu was known for many months to be in danger of failure. In March 2008, with losses in mortgages and accompanying defaults in credit card lending that decimated its stock price, interest rose among other banks to purchase WaMu—JP Morgan included.
But chairman and chief executive officer Kerry Killinger refused to sell, instead seeking an outside capital infusion that ultimately came from former director David Bonderman and his TPG private equity firm. In exchange for $7 billion in capital, Bonder was awarded a seat on the WaMu board and 176 million shares at a value of $8.75 each. This value was approximately 25 percent lower than the trading price that day, which further degraded WaMu’s stock value and greatly angered investors.
As a result, Killinger was stripped of his chairmanship on June 2. But the move only delayed the bank’s inevitable collapse, itself accelerated by the failures of Fannie Mae, Freddie Mac and Lehman Brothers. With the value of its assets plummeting and the bank’s credit rating sinking, WaMu’s shareholders attempted a final gambit, ousting Killinger in favor of Alan Fishman.
Killinger’s plan had been to turn WaMu into the “Wal-Mart of Banking,” where low- and middle-income people could obtain mortgages and other loans when other banks might turn them down. Much of the lending would be on subprime terms—the very profiteering scheme that triggered the foreclosure crisis. In order for subprime mortgage lending to remain sustainable over time, a continuous increase in housing prices was necessary, along with stable interest rates. But housing prices began falling in 2006, while interest rates rose, and the precarious foundation of the subprime bonanza finally collapsed.
Whereas changes in leadership can often boost investor confidence, Fishman’s elevation to CEO was no salve. The run on the bank forced the FDIC’s hand to prevent a full implosion. The collapse of WaMu would have drained what little remained of the FDIC’s reserves to insure deposits up to $100,000 each. Long neglected by the government, the FDIC had only $45.2 billion at the end of June, and it was forced to pay out a significant portion of that amount in guaranteeing depositors of IndyMac in July. It is estimated WaMu would have cost the FDIC at least $30 billion.
Instead, the FDIC seized WaMu directly and sold most of the bank’s assets and liabilities to JP Morgan, which will immediately take control of WaMu’s operations and deposits. WaMu and its holding company, WMI Investment Corp., filed for bankruptcy on Sept. 26.
JP Morgan will have to write down between $30 and $50 billion of bad debt. But after taking over the compromised investment giant Bear Stearns earlier this year in a similar move, JP Morgan now has a nation-wide franchise rivaling the giant Bank of America.
The fall of WaMu reaffirms that the historical tendency towards greater consolidation of capital into fewer and fewer hands still holds true, even in the modern-day economy dominated by corporate titans. Monolithic, larger-than-life institutions that are unable to withstand the crisis quickly crumble to the ground. Whatever they leave behind is swallowed up by those capitalists who make it through the storm.
FDIC intervention little consolation for jobless, penniless workers
The intervention of the state through the FDIC is an attempt to rescue capitalists, not workers. Hundreds, maybe thousands of WaMu employees had been laid off earlier in 2008 due to restructuring of operations, and 5,000 jobs may have been lost thanks to the seizure, sale and bankruptcy. Though deposits were spared, the retirement plans of many workers were wiped out along with stockholders and some bondholders. Yet Fishman, who was on the job less than three weeks, was awarded $11.6 million in severance pay and will keep his $7.5 million signing bonus.
In other words, a bank—a vessel of capitalist profit at the expense of people’s needs for housing and employment—failed due to its own practices and the broader economic crisis. Many thousands, perhaps millions, of people were left penniless or jobless as a consequence, but the chief executive who oversaw the final fall was rewarded nearly $20 million.
The fall of yet another financial giant has only intensified the panicky stampede of bankers and financiers trampling working people on their way to the emergency exit. The federal government’s gift-wrapped bailout for the wealthy will do little to help workers whose jobs, benefits, homes and retirement plans are quickly going up in smoke. The burden of this crisis should not rest on the shoulders of working people but on the shoulders of the rich. It is the rich, not working people, who have any real interest in preserving this exploitative and crisis-prone system.
