Back Flips, Cartwheels and High-fives

All free if you had an uninsured account (i.e., one over the $100,000 FDIC insurance limit) at Washington Mutual. Because the Federal Government just seized those uninsured accounts and sold them to JP Morgan for a $1.9 billion song. JP Morgan only bought the deposits, assuming none of WaMu’s debt. (They are assuming the risk of the portfolio, of course, which includes a substantial amount of mortgage-related assets, though if a bailout gets passed they may have the chance to offload this risk on the government as well.)

Anyone out there have a clue why the FDIC decided to bail out uninsured depositors and, as a direct consequence of that, wipe out unsecured bondholders?

If the market views this as a precedent, we should see an acceleration of the run on money-market funds, which we are already seeing to some extent. Also we should see a further collapse in lending to the regional banks. If the government is going to play favorites among different classes of creditors, without any clear pattern or principle, then why on earth would you extend credit?

When I said that the winners from all this would be JP Morgan and Bank of America, I had no idea how obvious the government’s efforts to engineer that outcome were going to be.