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WaMu vs. Wachovia

Last edited: Wednesday 11/26/08 1:30pm

Not affiliated with WaMu, or JPMorgan Chase, not an organization, just a burned shareholder seeking compensation.


WaMu and Wachovia were similiar banks. Below they are compared in some regards. The numbers are previous to the mergers for each.

	WaMu	Wachovia
Branches	2,239	3,343
Employees	43,198	117,000
Deposits	$188.3 Billion	$418.8 Billion
Loans	$307.02 Billion	$764.4 Billion
Rank by Deposits	6th Largest	4th Largest
Corporate Structure	Holding Co.	Holding Co.
Year Founded	1889	1879
Head Quarters	Seattle, WA	Charlotte, NC
In Number of States	15	21
Percent Bad Loans	3.62%	3.05%
Dates of the "run"	09/15-9/25/08	09/26/08
Size of "run"	$16.7 Billion	$5 Billion
Days of "run"	10	1
Dollars per Day of "run"	$1.67 Billion	$5 Billion
Size of "run" as Percent of Deposits	8.8%	1.2%
Percent Per Day of "run" on Deposits	0.9%	1.2%
Liquidity Before "run"	$50 Billion	?
Buyers Writedown	$31 Billion	$74 Billion
Written Down Percent of Portfolio	7.4%	9.7%
Buyer Paid	$1.9 Billion	$15 Billion

For another comparison IndyMac’s “run” was $1.3 Billion against total deposits of $19.06 Billion, so 6.8% of deposits, and occurred over two weeks, June 30 - July 11, 2008, so about .5% per day. IndyMac was not merged and is being run by the FDIC.

Both WaMu and Wachovia were in the process of seeking a merger. Wachovia was talking primarily with Morgan Stanley, Wells Fargo and Citigroup. Both reached a crisis point at about the same time. The WaMu fiasco triggering the final crisis at Wachovia. The outcomes though were very different. Wachovia shareholders own stock that is trading at about $5.00. WaMu shareholders are wiped out.

Much of what happened to WaMu can be learned from reading the WaMued-The Story page of this website.

The day after WaMu was seized, Friday September 26th, Wachovia's stock opened at $10.10 down from a Thursday close of $13.70, and closed the day almost even at $10.00. The following Monday September 29th it opened at $1.26 and closed at $1.84. What caused this plunge was on Friday September 26th Wachovia customers spooked by the FDIC's WaMu takedown fiasco of the day before, and Congress's failure to pass the bailout bill, withdrew $5 Billion dollars from Wachovia. Just as with WaMu other banks were expressing reluctance to lend liquidity overnight to Wachovia through the Federal Funds program for fear of not being paid back. Over the weekend the FDIC decided to act. Reality took a grip and the FDIC, and in a move they should have used for WaMu, finally moved beyond the legal technicality of a least cost resolution, and in a dose of financial management, implimented the systemic risk clause. This gave them options in dealing with Wachovia other than seize and destroy. The FDIC told Wachovia to sell its banking business to Citigroup or face a bank seizure like WaMu had. Wachovia had no choice but to agree and it was announced Monday that a deal was being done and Citigroup was paying $2.1 Billion for Wachovia's banks. The FDIC brokered the deal and released this press release on Monday September 29th, 2008.

Citigroup agreed to absorb up to $42 billion of losses on a $312 billion loan portfolio and the FDIC agreed to absorb all losses beyond that. Citigroup paid the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for taking that risk. To pay for the deal, Citigroup expected to raise more than $10 billion by issuing new common stock shares, and it cut its dividend in half to 16 cents a share. The deal gave shareholders $1 per share, and all bond holders were left intact and their bonds assumed by Citigroup.

Due to finally implimenting the systemic risk clause Wachovia was treated much better than WaMu. WaMu was not given an advance notice they would be seized, they were backstabbed. Wachovia was not auctioned off in advance, derailing a sale effort or obligating the FDIC to seize their bank. Citigroup received risk guarantees on Wachovia's loan portfolio, which was exactly what all the potential buyers of WaMu had said they needed to seal a deal. It is entirely unfair that two such similiar banks should receive such different treatment by the FDIC a mere three or four days apart. This sort of inequitable injustice is what has caused social revolutions the world over. That the FDIC and the Government have not addressed this FDIC faux pas, or made compensation to the WaMu shareholders and bond holders for it, will be a chilling effect on the US markets for the lifetimes of everyone who witnessed it, and financially far more expensive then simply apologising and making compensation.

On Wednesday October 1st the IRS issued Notice 2008-83 and defined the way merging banks may account for the purchase of bad loans within a bank merger. Specifically that they would be deductible as if the acquirer had originated the loan. This created a tax benefit from the bad loans when buying a bank. Previously the mark to the market rule applied, which treated the loans as a devalued asset and this did not allow for a deduction tax benefit and made the loans a worthless or near worthless asset.

Wells Fargo had shied away from a Wachovia merger over this issue. Citigroup and Wachovia had still not signed a deal. Now that the tax benefit would carry over Wells Fargo went back to Wachovia. On Friday October 3rd Wells Fargo and Wachovia announced that Wells Fargo would purchase Wachovia for $15 Billion. $13 Billion more then the Citigroup deal arranged by the FDIC and a deal that would leave stockholders and bond holders whole. The deal valued Wachovia at $7.00 a share based on that days closing stock prices.

At issue here is once again the timing of everything dealing with WaMu. Had this tax law been released earlier or if WaMu had been left to operate another week, WaMu would have been an appetizing merger candidate for its tax benefits the same as Wachovia. JP Morgan, Citigroup or Wells Fargo all would have likely paid a decent price for WaMu and everyone would have been left whole. WaMu had the liquidity to survive, the FDIC moved because it feared certain amounts of deposits would be withdrawn. There is no evidence possible whether the deposits would or would not have been withdrawn. WaMu and Wachovia were both forced to do things by the FDIC. Only the outrage over WaMu likely prevented the FDIC from immediately seizing Wachovia, and instead got them a talking to and an arranged merger. There is no reason this could not have been done for WaMu. There were lots of other less drastic actions that could have been applied to WaMu as well. Wachovia shareholders are alive and well today, as the stock price has recovered to about $5.00 in a horrendous bear market environment. The seize and dismember at any cause philosophy of the FDIC has a primary catalyst to the market plunge since the WaMu takedown fiasco. Investing in banks is not worth the political risk imposed by the FDIC's philosophy of handling large banks. WaMu should never have been seized just on the systemic risk variable alone. Seizures are designed for small local banks. Once you are up in the hundreds of branches more finesse is needed to massage the problems out of the system rather than swinging a battle ax. It was the IRS that saved Wachovia shareholders and bond holders.


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