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.
The farther this thing goes, Noah, them more convinced I am that these guys don’t know what they’re doing. I’m terrified.
— Freddie · Sep 26, 03:00 PM · #
“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?”
I believe this is required by the “depositor preference law” passed in 1993, making uninsured deposits senior to other unsecured claims.
— ed · Sep 27, 07:08 AM · #
ed – good point; I erred if I implied that uninsured depositors and unsecured bondholders would be pari passu in bankruptcy.
But I don’t think that means FDIC was required to seize the bank whole and leave senior unsecured bondholders with nothing. WaMu hadn’t filed. This was an intervention to prevent a filing and transition the bank smoothly to a new owner, by wiping out bondholders.
I think the answer as to why they did that was so that FDIC wouldn’t have to pay out anything on its insurance – if they had let WaMu file, that might not have been the case. And FDIC is too big to fail, which means WaMu was, too. But I think my point about the unintended consequence of discouraging private lending to banks still stands.
BTW, I’m surprised that this doesn’t put JP Morgan over the 10% statutory limit on bank deposits. I assume that’s because WaMu’s a thrift, so their deposits don’t count towards the limit?
— Noah Millman · Sep 29, 02:42 AM · #