No one questions that the federal government can and should take over and repackage failing banks, but last night's seizure of Washington Mutual's raises questions that are troubling
at best. The ailing thrift, whose days everyone knew were numbered, (is) (was) headed by a CEO Alan Fishman
who was specifically brought in to sell the company. While the top tier of buyers had looked at WaMu's books and decided to take a pass, there was evidence that a sale to a private equity buyer was in the offing, and talks were ongoing. Several banks were interested in expanding their businesses through WaMu's extensive network of branches.
Two weeks ago, WaMu announced
that it was taking writedowns in the third quarter, and that it had sufficient capital to return to profitability. While WaMu continued to look for a buyer, the company also said that it expected its capital ratios at quarter-end to remain significantly above the levels for well-capitalized institutions.
Last night, after the market closing, it was announced that a deal for a sale had been made with JP Morgan and that there would be a conference call at 9:15 EDT with the details. At first it was unclear what had happened. No news was forthcoming from WaMu, as WaMu's deal team, including Mr. Fishman, had boarded a plane in New York to fly to WaMu's main offices in Seattle. While Mr. Fishman and his party were in midair, the FDIC seized the bank on the pretext that a credit downgrade late in the day by Standard and Poors had sounded WaMu's death knell, giving no notice to Mr. Fishman or to WaMu's Board of Directors.
By the time 9:15 arrived JP Morgan's phone lines were so jammed that it was impossible to tap into the conference call, and JP Morgan's website went down under the strain of traffic. In the space of 2-3 hours, in what may be remembered as the fastest deal in history, the Office of Thrift Supervision seized the bank and turned it over to the FDIC as receiver which promptly sold all the assets through a bidding process, with JP Morgan declared the winner. Shortly after the conference call
was ended, JP Morgan issued a press release crowing about the fabulous deal
they had made. The truth then emerged that JP Morgan bought and what the US Government sold was the assets of WaMu, and not the company. JP Morgan had offered $8.00/share earlier in the year
in a stock deal, and last night's action cost them only half as much with little change in WaMu's balance sheet in the interim.
In the meantime, WaMu stock traded yesterday between a high of $2.34 and $1.60, prices which reflected the highly speculative nature of the security but did not take into account imminent federal seizure. There is talk that the S&P downgrade was a prediction of worth if the company was broken up and sold. The vast majority of WaMu Shareholders were institutions, but plenty of small speculators
were also caught by surprise by the lightning fast government deal. Today, WaMu stock
has been selling at about 16 cents per share and trading will be halted
on the part of the government cannot restore faith in America's markets. Theoretically, this is the goal of the sudden interest on the part of the government to involve itself after years of neglect and ongoing capital liquidity problems. The way that the government seized and sold the assets of Washington Mutual is almost a textbook example in how to destroy confidence in the marketplace. Generally speaking, the Office of Thrift Supervision telegraphs its impending takeover in a way that the markets can process this information in an orderly manner. Generally speaking, this is done over a weekend and isn't a surprise.
It took ten days in October of 1917 for Russian revolutionaries to seize their government following years of unrest under Czarist rule. The October Revolution was not the first action by the Bolsheviks nor was it unexpected. In 2007, with unchecked and unaccountable government power, that time frame can be reduced to less than overnight.
UPDATE: The September 29, 2008 Wall Street Journal has an interesting article
on how JP Morgan raised 1..5 billion in 24 hours.