Washington Mutual

Did you know that Washington Mutual began just after the Great Seattle Fire in 1889? Here is a thumbnail sketch of its history. It has been around over a century and it appears that now its days are numbered.

Washington Mutual appears to have gone the way of Seafirst Bank in the 1980’s. Seafirst was at the time the biggest, baddest bank in the region and its board of directors hankered for more. At that time national banks were getting fat on third world loans and energy loans. Remember that an asset for a bank is a performing loan.

So you make a loan and you have an asset until a few payments are missed, then it flips to the other side of the balance sheet. This makes banks which loan heavily in one sector quite vulnerable to slumps in that sector of the economy. If the sector slows down things can turn around fast for the bank.

Banks hedge their bets by selling portions of their loans to other banks, called “participations.” The problem is that this seems to encourage banks to dive much deeper into a given area, so that the advantage of selling off portions of the loan are lost by the sheer magnitude of the lending. Penn Square Bank, a little shopping center bank in Oklahoma City, started making oil loans by the billions and selling off participations to banks around the country. Seafirst invested hundreds of millions of dollars in these participations, as well as serving as the primary bank in many of the loans and became a big player as rapidly as Washington Mutual.

But the bubble burst and Penn Square Bank folded, sending the biggest banks in the country into insolvency. Seafirst, already strapped with nonperforming third world loans was purchased by BankAmerica.

Ten or fifteen  years later Washington Mutual decided to become a big player by riding the home lending boom. It succeeded and grew exponentially. With the bursting of that bubble, it too has I think reached the end of its days. It has probably not been bought out because of concerns about the market — home loans — into which it plunged. Financial institutions are not sure that the bottom has been reached and are reluctant to jump in even at fire sale prices.

There are only two major investment banks left standing and there are serious questions as to whether either one can survive.  With Barklay’s, a foreign bank, buying Lehman it appears that the pool of potential domestic buyers is reduced if not depleted.  It is at least questionable whether the federal government can afford to prop up Washington Mutual, but the country could ill afford to have a bank of its size fail.

Colossal mismanagement has put us in a situation where we are steeped in debt and watching our financial assets, so far only historic investment houses, taken over by foreign interests.

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