Senator Corker challenged Mr. Volcker's stance in today's congressional hearings on the Volker Rule by saying that no financial holding company that had a commercial bank failed while performing proprietary trading. It appears as if Mr. Cofker may have received his information from the banking lobby, and did not do his own homework.
Let's reference the largest commercial bank/thrift failure of the all. First off, a little historical reference courtesy of WSJ.com:
The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis...
The seizure was another watershed event in a frenetic period for the U.S. banking system, and came while members of Congress wrangled over the Bush administration's proposed $700 billion bailout package. The tally of U.S. financial giants that have either been seized by the government or sold themselves off to stronger firms in recent weeks includes mortgage titans Fannie Mae and Freddie Mac, insurer American International Group Inc., and Wall Street firms Lehman Brothers Holdings Inc. and Merrill Lynch & Co.
The failure of WaMu eclipsed what had long been America's largest bank bust on record, the 1984 collapse of Continental Illinois, which had $40 billion in assets.
The seizure of Washington Mutual is likely to send tremors through the thrift industry. Many of WaMu's smaller brethren are also struggling with a wave of bad loans and some have already been ordered by regulators to raise capital and stop growing. Many community and regional financial institutions are also slashing dividends, selling branches and reining in lending in order to preserve capital...
While WaMu has been struggling since last year, its demise occurred with breathtaking speed.
Starting Sept. 15, the day that Lehman filed for bankruptcy protection, WaMu's customers began heading for the exits. Over the next 10 days, they yanked a total of $16.7 billion in deposits, according to the Office of Thrift Supervision. That was about 9% of the thrift's deposits as of June 30. WaMu declined to comment...
In March, with the credit crisis in full bloom, J.P. Morgan offered to acquire WaMu but was spurned in favor of a $7 billion infusion led by the private-equity firm TPG, considered one of the savviest buyout firms. TPG, led by investor David Bonderman, said it will lose $1.35 billion, wiping out its investment....
"Obviously, we are dissatisfied with the loss to our partners from our investment in Washington Mutual," said a TPG spokesman. "The unprecedented turmoil in global financial markets and resulting macro crisis of confidence has radically changed the dynamics for all financial institutions, and led to widespread losses among investors throughout the sector." TPG said its losses are about $1.35 billion, wiping out its investment....
Regulators also hustled to shut down WaMu faster than they have with other failing banks this year. Normally, when the FDIC and another regulatory agency are preparing to take over a bank, the FDIC will solicit bids for the bank on Tuesday or Wednesday and then seize it on Friday evening, after the bank's branches have closed for the weekend. Sometimes the FDIC will even wait another week to step in. Every bank to fail this year has been shut down on a Friday. The FDIC steps in on Fridays to ensure a smooth transition so that customers hardly notice the handover.
In WaMu's case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts of WaMu. Twenty-four hours later, they were already preparing to seize the bank. Earlier this month, Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal J.P. Morgan had offered earlier this year, according to a person close to WaMu.
As pressure mounted on WaMu over the past two and a half weeks, regulators sparred over how to handle the situation, according to people familiar with the matter. Last week WaMu met in Washington, D.C., with the FDIC and OTS, WaMu's chief regulator. WaMu, according to a person familiar with the situation, asked for the meeting because it had received conflicting information from the two agencies. The tension between the two groups was palpable, this person said. The FDIC, this person said, was more aggressive in describing the information it wanted from the thrift.
Federal regulators said the exodus of deposits left WaMu "with insufficient liquidity to meet its obligations." As a result, WaMu was in "an unsafe and unsound condition to transact business," according to the OTS.
The OTS closed WaMu on Thursday and appointed the FDIC as receiver. The FDIC ran the bidding process that resulted in the decision to sell WaMu's banking operations to J.P. Morgan....
"The housing market downturn had a significant impact on the performance of WaMu's mortgage portfolio," said OTS director John Reich. [which was actively traded on a proprietary basis, hence the pertinence of the Volcker Rule]
With mortgage losses mounting and its stock price plunging, WaMu has been scrambling over the past month to find a solution. Last week, it put itself on the auction block. A number of banks -- including Citigroup Inc., Wells Fargo and Banco Santander SA -- pored over WaMu's books, but the bank didn't receive any offers. This week, WaMu's outside bankers approached a group of private-equity funds to gauge their interest in a deal. Those talks were viewed as a last-ditch effort.
The article above was date SEPTEMBER 26, 2008. I warned my blog readers about Washington Mutual in September of 2007, and was short the stock from that point until its demise. Reference "Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide to its Peers", Saturday, 08 September 2007 :
From my experience, there is evidence of this from Lehman Brothers, Washington Mutual and potentially IndyMac Bank as well. I am fairly sure that there are surprises to be had from all three of these banks as well in the upcoming quarters, big surprises. These practices were supported indirectly by Citibank, Lehman Brothers and Wamu through their warehouse credit lines to subprime mortgage banks, most of which have gone out of business or scaled down operations...
Wamu's nonperforming loans have doubled from the June 30th quarter of ‘06 to the most recent quarter, from .62% to 1.29%, but excludes "Excludes nonaccrual loans held for sale". My best guess is that these are the loans that have not been earmarked for the investment portfolio, and are being held for sale, thus are not held under the accrual accounting rules. If this is the case, these numbers were delivered just before the massive upheaval in the markets where investors totally shunned the MBS products. If my hunch is correct, then "Excludes nonaccrual loans held for sale" category will be forced into the investment portfolio, and this may look bad. The banks tried to sell off the garbage, and Wamu wrote its fair share of it. Reference their option arm product which was not only an annual (and monthly) arm product, but gave the payer the option to go negative amortization (pay a portion of the interest and allow the rest to get tacked onto the principal)...
Even in reclaiming the property through foreclosure, Wamu will take a BIG loss on these. Wells Fargo shows a large amount of Level 3 gains in their latest earnings report. Level 3 gains are those market to myth (I mean model) profits that are derived from modeling a price in lieu of obtaining it from the market place. They may be force to keep these on the books for a long time and/or take significant losses on them. More on Wells Fargo later...
I think Wamu got stuck with a lot of this stuff... Unlike Countrywide, Wamu appears to have adequate liquidity due to a larger and more diversified thrift business, but that doesn't mean that they ain't going to lose a lot of money on their less than prudent lending practices. Their tangible equity to total capital is 6.07%, but includes the footnote "Excludes unrealized net gain/loss on available-for-sale securities and derivatives, goodwill and intangible assets (except MSR) and the impact from the adoption and application of FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006. Minority interests of $2.94 billion for June 30, 2007, $2.45 billion for March 31, 2007 and December 31, 2006 and $1.96 billion for September 30, 2006 and June 30, 2006 are included in the numerator." Now this is scary, for these are most likely the derivatives that have no credible bid, thus cannot be priced and/or marked to market. Exactly what is the unrealized net gain/loss and how is it derived? We're talking 20.1 billion in subprime, and almost 30 billion in multi-family loans with a total of 206.7 billion dollars of loans in their portfolio. Wamu does not want high defaults or the impairment of their collateral. I think both are a forgone conclusion due to the aggressive underwriting to obtain these loans, specifically through the Option ARM product. How much so is the question. The Home Loans group within Wamu has taken consistent losses for the last 4 quarters, primarily due to provisions for losses and non-interest expenses.
Now, on to the importance of the Volcker Rule since we have put WaMu into historical perspective.
Washington Mutual Hires John Drastal as Managing Director of Trading for WaMu Capital Corp.
Publication: Business Wire
Date: Monday, November 18 2002
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SEATTLE--(BUSINESS WIRE)--Nov. 18, 2002
WaMu Capital Corp., a fixed-income institutional broker-dealer and subsidiary of Washington Mutual, Inc. (NYSE:WM), has hired John Drastal as the managing director of trading.
Drastal will oversee all fixed income trading and risk management within the firm, and will act as primary contact within the dealer community.
"John will play a key role as WaMu Capital Corp. continues to build out its mortgage and securitization platform," said Tim Maimone, president, WaMu Capital Corp. "Over the next year we expect to strategically grow our sales and trading operations. We also plan to open a New York sales office to complement our current offices in Seattle and Los Angeles."
Drastal brings a wealth of Wall Street experience to the broker-dealer. Prior to joining WaMu Capital Corp., Drastal spent five years as managing director and principal for Donaldson, Lufkin and Jenrette, where he was responsible for all aspects of the mortgage and asset-backed security trading business, including position and risk management, personnel, distribution, research, finance, operations and new business development.
In his 14 years of experience in fixed-income trading and management, Drastal has also held senior positions at Goldman Sachs and Company, Lehman Brothers Inc. and Drexel, Burnham and Lambert. Drastal holds a master's degree in industrial administration (MBA) from Carnegie Melon University and earned a bachelor's degree in computer science from the University of Delaware.
About Washington Mutual
With a history dating back to 1889, Washington Mutual is a national financial services company that provides a diversified line of products and services to consumers and small- to mid-sized businesses. At September 30, 2002, Washington Mutual and its subsidiaries had assets of $261.10 billion. Washington Mutual currently operates more than 2,500 consumer banking, mortgage lending, commercial banking, consumer finance and financial services offices throughout the nation.
It is truly unfortunate that such misinformation and disinformation is allowed to permeate through not only the media, but actual congressional hearings. It is truly a shame. If I am not mistaken, WaMu was the biggest bank/thrift failure, EVER! If anything, this should provide momentum BEHIND the Volcker Rule in lieu of having politicians trying to out-regulate an accomplished regulator on how to regulate banks.