Fri, September 26, 2008
Surveying the Wreckage
Unless you live in Lake Wobegon, it hasn't been a quiet month:
- Fannie Mae and Freddie Mac are in federal conservatorship
- Merrill Lynch is now part of Bank of America
- Lehman Brothers Holdings filed for Chapter 11; its assets have been purchased by Barclay's PLC
- The two investment banking giants left standing, Goldman Sachs and Morgan Stanley, have been converted to bank holding companies
- AIG has received an infusion $85 of billion from the Federal Reserve in return for a 79.9% ownership position
- Washington Mutual became the 13th bank failure of the year (and the largest bank failure in U.S. history); the bank's assets have been sold to J.P. Morgan Chase
Are we there yet?
I did feel a twinge of remorse last week when I referred to Washington Mutual as squirrelly, but it appears that the FDIC held a similar opinion. The silver lining here is that the bank was taken over without drawing down the FDIC insurance fund. J.P. Morgan Chase took over the bank’s $300+ billion in assets and is expected to write down about $30 billion in bad loans held by WaMu. Chase is now the largest bank in the country.
The resolution of the WaMu drama is good news for everyone except its unsecured creditors and stockholders. The future is probably not bright for similar thrift banks holding bad loans; they will either have to tighten their belts or be absorbed by larger brethren.
The WSJ’s Wallet blog has some helpful information for Washington Mutual customers who are wondering what happens next. Among the bits of good news: customers with accounts at both banks in excess of FDIC limits have a six-month grace period in which to rearrange their assets.
There are still some troubled banks around and more will likely fail, but the FDIC’s “watch list” is a good deal shorter than it was prior to the S&L crisis of the 90’s. That’s good news.
I haven’t written about the government’s $700 Billion bailout plan because the fat lady has not sung yet; it remains to be seen what the plan will be. The news that Secretary of the Treasury Henry Paulson actually got down on one knee to beg House Speaker Nancy Pelosi to keep the plan negotiations alive was heartening: who knew our public servants possessed such humility?
Once Congress has settled on a plan to address the problem mortgages that remain, we still won’t be out of the woods entirely. Even before the excitement started, there were evidences that the nation’s economy is in recession, as noted in the Economist’s View blog. If confidence is returned to the financial markets, we will still have to deal with that, and there’s a good chance that economic growth outside the US will slow as well.
Business Week notes that next week there may be a wave of hedge fund investors giving notice of their intention to pull money out in 90 days. Fund managers may respond by selling stocks, which could further depress the equity markets.
It looks as though things will get worse before they get better. There are undoubtedly now some undervalued investments in the marketplace, but there’s still a pretty high level of risk. Diversification - of all kind of risks, not just investments - is probably more important now than ever.
