More On the Gifting of WaMu to "Obama's Favorite Banker"

Botton line:It was about "Obama's Favorite Banker," Jamie Dimon, wanting more of a West Coast banking presence, but Portfolio.com in an investigative piece has some of the details of how the government simply ripped WaMu from its shareholders and gave it to Jamie. Here are some excerpts about the gift to Jamie and what it means for banking overall:

WaMu’s regulators said they based their decision to close the bank and sell it to JPMorgan Chase on lack of liquidity—its access to ready cash—and the mounting pile of failed mortgage loans that were expected to cripple the bank’s earnings for months to come.

But new information—gathered from internal documents and interviews with scores of former WaMu executives, regulators, and other experts—shows that WaMu had plenty of cash on the day it was seized, and a regulator-vetted plan to operate with even less money if necessary.

WaMu also had ample capital—more than the regulatory levels for a “well-capitalized” bank...

“Someone needs to take a serious look at this because they weren’t illiquid,” said a senior federal official with direct knowledge of WaMu’s circumstances...

Yet more than a year later the details of the decision remain shrouded from view. WaMu’s main regulators—the Federal Deposit Insurance Corp. and the Office of Thrift Supervision—continue to decline requests to discuss their actions, release liquidity figures, or give any other evidence that the bank was in a precarious situation that demanded immediate action. In refusing the disclosures, the regulators cite confidentiality regulations for a bank that no longer exists except in a liquidation proceeding and as a basis for numerous lawsuits...

Similar secrecy surrounds other bank failures. As the toll of closed banks mounts—more than 140 have been shut by regulators since the housing bubble burst in early 2008—and as Congress prepares to overhaul the regulatory structure, more people are asking what exactly was wrong with these banks, and whether regulators always acted appropriately in closing them...

Some see a much broader and more worrisome effect from the government’s discretionary and murky process. As one WaMu executive put it: “If you’re a shareholder in any bank you’d have to really look at it and say, ‘What are the parameters here? Can they just seize any bank at any time?’”

After regulators shut down First Bank of Idaho in April, for example, congressmen Mike Simpson and Walt Minnick said regulators had “intentionally destroyed” a pillar of the community “through inappropriate use of their powers.” The Idaho lawmakers asked why regulators acted so abruptly when the bank was close to raising a needed $10 million...

WaMu already faced a growing mass of failed mortgage loans, creating an exposure that was impossible to quantify at the time, but surely ran to billions of dollars.

But if regulators had waited just six business days, WaMu could have been helped by the government’s $700 billion Troubled Asset Relief Program, and by an increase in bank deposit insurance limits to $250,000 from $100,000, a move that helped stop panic withdrawals at all banks. Those changes almost surely would have further quelled a bank run that struck WaMu in September and had already slowed, according to banking experts and people familiar with WaMu’s situation...

Under the current fractional reserve system, all banks are only a hair away from being illiquid. The government could justify pulling the plug on many of them, yet some they pull the plug on, and others they prop up. If there ever was the scent of behind the scenes political machinations, it's these decisions as to who lives and who dies.

Read the full article here.