Friday, September 26, 2008

WaMu Bye-Bye; one of the Big Six next?

Late last night, Seattle-based Washington Mutual, the largest savings and loan in America (setup not unlike a credit union) was seized by federal authorities and some of its core assets then immediately sold to JP Morgan, the parent of Chase Manhattan Bank. The move now makes Chase the largest bank in the US, surpassing Bank of America.

In so seizing then flipping, the Federal Deposit Insurance Corporation was saved from having to bail out customers to the tune of $31 billion -- the FDIC will cover depositors' first $100,000 and Morgan has promised to cover the rest. The trust fund had been at $45.2 billion before IndyMac collapsed in June then a series of other bank failures or fire sales followed.

This collapse is way bigger than the 1984 collapse of Chicago-based Continental, which Canadians will probably remember since its sudden emergence and then disappearance of a branch plant here around that time was seen at the time as a challenge -- then vindication -- to the Big Six here.

It also sends a sobering sign to both investors and ordinary depositors. WaMu is bank # 13 to fail in the US this year. One report I read not too long ago suggested that as many as 1000 banks could either be seized or sold to bigger banks as part of an industry-wide consolidation. A good opportunity for people looking for values but bad news for investors who had bonds or stocks and will now be wiped out.

We tend to be smug about the whole thing in Canada given the relative strength of our banking system. However, the old saying is true, when America sneezes, Canada catches the cold sooner or later.

But it's entirely possible for one of the Big Six, or Desjardins Credit Union, to run into major trouble in the near future. Most if not all have had to write off some assets related to bad mortgages in both Canada and the US. What affect will that have on the trust fund of our deposit insurance system? Consider this: While the CDIC insures $466 billion in deposits, it only has $1.55 billion cash on hand. That's up from about a billion a couple of years ago but that's it. If one of the smaller member banks -- about 80 in total -- wound up, no problem. One of the big guys -- huge problem. Provincially chartered banks don't have that much back up either from provincial bodies. Neither do the 500 or so member institutions that make up Desjardins, also backed by the small funds in the provincial deposit trusts.

The CDIC makes it clear that where it acts jointly with its provincial counterparts to save someone's deposits, the combined total is $100,000 per person -- period. That might unnerve some investors who think they've got their butts covered twice and for twice that total.

And keep in mind, too, that on the other hand banks often split themselves up into several dummy companies so depositors can get around the $100,000 per institution rule -- often the insured amount can be a half million or more. In the end deposit insurance is merely a safety cushion. We're really being set up for a huge crisis when the shoe finally drops. Not if, but when.

Also, silence about this from all party leaders here. Why? The silence from Harper, who keeps insisting that our fundamentals are "strong" is especially telling. We've heard that lie in the States, many a time before.

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Skinny Dipper said...

Dang, I thought this was about Wal-Mart.

BlastFurnace said...