By Thomas Heath and Binyamin Appelbaum
Washington Post Staff Writers
Tuesday, September 16, 2008
Washington Mutual, the Seattle-based savings and loan giant whose stock has been hammered the past week, has raised concern because its demise would be the largest bank failure in U.S. history, putting stress on the Federal Deposit Insurance Corp. to cover depositors.
Washington Mutual yesterday closed at $2 per share, down 27 percent on the day. The stock is 95 percent off its 52-week high. Standard & Poor's downgraded the company's credit rating to junk status, citing the deteriorating housing market.
"The cost to the FDIC if this company fails is likely to be quite high," analyst Rich X. Bove of Ladenburg Thalmann wrote. He estimates the net cost to the FDIC at $24 billion, which is about half of the assets in the FDIC's insurance fund.
The FDIC doesn't comment on specific cases, but a spokesman said yesterday that the fund has sufficient resources to cover the failure of a very large bank. In most cases, the FDIC promises to guarantee deposits up to $100,000. The government regards that promise as sacred. The FDIC might just have to borrow money from the Treasury Department to meet its obligations to depositors.
"We're confident that our resources would be more than adequate to cover any losses from bank failures," FDIC spokesman Andrew Gray said.
Washington area hedge fund managers who specialize in financial firms think the chances of Washington Mutual seeking bankruptcy protection are unlikely. Even if the bank does go under, they said, the FDIC could endure the hit.
"The loss can be absorbed by common shareholders, preferred shareholders and bondholders, in that order, before you get to the deposit insurance," said Gary Townsend of Hill-Townsend Capital, a Chevy Chase hedge fund that concentrates on financials. "I assume that's not enough to break the [FDIC] bank."
Eric D. Hovde of Hovde Financial, a District hedge fund that trades in bank stocks, said Washington Mutual should not be lumped in with Lehman Brothers because he said it has billions of dollars in savings account deposits that make it less vulnerable.
"Does WaMu have problems? Yes," said Hovde, who said he has no stake in the company. "But fundamentally, they shouldn't be in a position of failing but for the press and others whipping up the fear on a failure. They are meeting their tangible capital requirements today. They have a much better funding structure [than Lehman], and it's a much more regulated entity. You can't compare WaMu to Lehman."
TPG, one of the country's largest private-equity funds, bought a 14 percent stake in Washington Mutual earlier this year and presumably could buy more.
"Likely, when push comes to shove, they would make a further investment to keep the ship afloat," Townsend said.
A TPG spokesman had no comment.
A Washington Mutual spokesman also declined to comment.
The FDIC's insurance fund had assets of $45.2 billion at the end of June. Extrapolating from the average cost of all bank failures over the past decade, based on FDIC data, that was enough to cover the failure of banks with total assets of $288 billion. Washington Mutual alone had assets of more than $350 billion at the end of June.
Gray said that under some circumstances, the FDIC might turn to the Treasury for short-term loans to cover the initial costs of a failure, which it would then repay as it processed the failure and was able to replenish the insurance fund. He said the FDIC last accessed such funding in the early 1990s.
There have been only 11 bank failures this year, but industry consolidation means the average failed bank is now several times as large as ones that collapsed in the early 1990s.
The FDIC said it regarded 117 institutions as troubled at the end of June. It does not disclose the names of banks on the list.
The agency's board of directors will consider at its October meeting raising the insurance premiums that banks are charged. The insurance rates are set on a sliding scale based on the financial health of the bank; weaker banks pay more, reflecting the greater risk of a failure. Gray said the increase would be likely to raise rates disproportionately for those banks to make sure the weight of the increase was carried primarily by the banks at greatest risk of failure.
The Office of Thrift Supervision, which regulates Washington Mutual, has expressed increased concern about the company. The bank disclosed earlier this month that it had a "memorandum of understanding" with the regulator, requiring the company to improve its risk management and submit a business plan showing how it plans to address problems.
After Moody's downgraded the company's stock on Thursday, Washington Mutual issued a statement saying the downgrade was "inconsistent with the company's current financial condition."
Washington Mutual is in trouble primarily because of its role in selling option ARMs, mortgage loans with payment terms that resemble a credit card, allowing the borrower to pay less than the total due each month. The default rates on such loans more closely resemble the high failure rates on credit cards than the low failure rates on conventional mortgage loans.