WaMu on the brink of disaster: has agreement with regulators

By Edward Harrison On Sep 8, 2008

You have probably heard by now that Washington Mutual ousted its embattled CEO Kerry Kilinger and replaced him with former Sovereign Bancorp CFO Alan Fishman. But, what you have not heard is that WaMu has signed an agreement with the Office of Thrift Supervision (OTS) which requires WaMu to provide business plans and forecasts for results, asset quality, capital and business segment performance (Hat Tip: Calculated Risk).

Translation: WaMu may fail.

In announcing the ouster of Killnger, WaMu posted a press release on their website. Note the following statement buried deep in the release:

WaMu also announced that it has entered into a Memorandum of Understanding (MOU) with the Office of Thrift Supervision (OTS) concerning aspects of the bank’s operations, principally in several areas of its risk management and compliance functions, including its Bank Secrecy Act compliance program. In addition, WaMu has committed to provide the OTS an updated, multi-year business plan and forecast for its earnings, asset quality, capital and business segment performance. The business plan will not require the company to raise capital, increase liquidity or make changes to the products and services it provides to customers.

This is the step that regulators take to prepare the playing field for a potential bankruptcy or takeover. Remember, Washington Mutual is far bigger than IndyMac, which is the largest default we have seen in this credit crisis in the U.S. outside of the GSEs. If the FDIC were to take on Washington Mutual, it would need to have its funding base topped up by guess who — you, the taxpayer. And remember, Washington Mutual has over $300 billion in assets. If it were a bank and not a saving & loan, it would be America’s 8th largest bank.

Other financial institutions known to have a similar agreement with the OTS are National City of Cleveland, OH, also certainly needs to be on the FDIC’s list and Downey Financial.

Update: Neither National City nor Washington Mutual were on the FDIC’s ‘problem list’ two weeks ago as their asset bases are too large. CNN Money said on August 26th:

According to data released on Tuesday, the list included 117 banks in the second quarter, up from 90 at the end of March. The number has been increasing since the third quarter of 2006, when it hit a historic low of 47. Assets at the problem institutions totaled $78.3 billion in the second quarter, up from $26.3 billion.
–CNN Money

Note the total assets of the institutions on that list is only $78.3 billion or an average of less than $1 billion each. Does this mean that WaMu at NCC are too big to fail? The evidence is unclear. What is clear is that the OTS feels that there are enough problems at both institutions to put them under special agreements. And it is also clear that the FDIC is focusing on smaller banks. After all, it does not have enough capital to deal with the likes of NCC or WaMu.

Sources
Alan H. Fishman Joins Washington Mutual as Chief Executive Officer – Washington Mutual
WaMu replaces CEO, signs agreement with regulator – Market Watch
Problem banks: What you need to know – CNN Money
WaMu Drops on Regulatory Scrutiny as CEO Is Replaced – Bloomberg