WaMu’s Memorandum of Understanding

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WaMu ATMAll eyes have been on the Treasury Department taking Freddie Mac and Fannie Mae into conservatorship this week but Washington Mutual also entered into a Memorandum of Understanding with the Office of Thrift Supervision, the regulator that manages certain banking institutions (here’s the difference between thrifts, commercial banks, and credit unions). Along with the MOU, they got rid of their CEO Kerry Killinger and put in Alan Fishman, who started Monday.

Some see the memorandum of understanding as a precursor to a bank’s failure but it’s just an agreement for a higher level of information sharing between the OTS and the bank. According to one spokesperson, it was only an “informal enforcement action.” It’s certainly worse than a bank without an MOU but having one doesn’t mean failure is imminent. The MOU requires that WaMu share more of its operational level details with the OTS so that they can monitor its activity, it makes no changes to WaMu’s operations, offerings, or general business model.

While it’s certainly not a positive, it’s by far a sign that the bank is going to fail. As of August 26th, at least 13 banks have had regulatory actions on them. Six have been MOUs and others have been harsher restrictions on banking activity (managing capital ratios, dividends, etc.). National City has had an MOU since April/May of this year and they’re still ticking.

I’ve also had conversations with people who say the WaMu 5.00% APY rate on their 12-month CD is a sign that they have a liquidity crisis: “They need the deposits and are willing to pay a premium for them.”

I say, “So what?” If a man is in need of some money, is willing to pay a premium for it, and is backed by the same people who print the money use, why not lend it to him? 🙂

FDIC insurance covers you up to $100,000 per bank (more if you structure it right). When IndyMac failed on a Friday, doors were open on Monday as IndyMac Federal. When NetBank failed, customers could login to their new ING accounts within a few days. The most recently failure, Silver State Bank in Nevada, mirrored IndyMac… assumed on Friday and back in business by Monday. If you’re under FDIC coverage limits, you’re safe and there’s no reason why you shouldn’t take advantage of higher yields.

Let’s say they do go under, the worst case scenario is that the CD matures (no penalty) and you put your money elsewhere. That’s a price I’m willing to pay for an essentially risk-free 5.00% APY yield.

(Photo: thetruthabout)

{ 8 comments, please add your thoughts now! }

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8 Responses to “WaMu’s Memorandum of Understanding”

  1. Jeremy says:

    I hope WaMu does fail. Maybe they will finally stop sending me 50 pieces of junk mail every week. Or maybe that’s why they are going to fail, because they waste so much money printing off all their stupid junk and sending it to millions of people.

  2. I bought WaMu stock in 2006 because of its great divident yield. I am relieved to report that I sold it earlier this year.

    Although no doubt true in this case, offering a higher yield on deposits is not always a sign of capital or liquidity problems.

  3. EN says:

    Hmm…dicey business. I just opened a WaMu checking/savings for the CDs but I guess it won’t be lasting all too long. Oh well, like you said, nothing to worry about if you’re insured.

  4. jim says:

    WaMu should be fine, there are other banks in far worse shape still ticking and ticking strong, it’s a good time to take advantage of the 5% rate.

  5. Phil says:

    I think you’re a bit too sanguine about this, Jim. WaMu is several times bigger than IndyMac. If WaMu goes the FDIC will be in the hole and have to borrow money from Treasury. Now, I’m sure that the Treasury will give FDIC the money, but there may be a bigger lag-time before you can access your money as compared to the IndyMac case. And, you wouldn’t get that 5% interest on that CD.

    Maybe if they were offering 9% I might think about it, but @5% it’s not worth the hassle. Besides, why do I want to enable WaMu to continue to exist? They made some of the riskiest loans in the industy (Pay Option ARMs) they deserve to go down and likely will.

  6. El Cheapo says:

    At the same time, the company faces challenges ahead as interest rates will reset for prime adjustable-rate mortgages in 2010 and 2011, presenting what some analysts feel is the next wave of trouble for banks after getting hit by subprime defaults over the past two years.

    “Washington Mutual has a ton of that toxic stuff. They reported earlier in the year, in April, that option ARMs account for 50 percent of prime loans in its bank portfolio,” said Christopher Mayer, analyst and managing editor for the Capital and Crisis newsletter. “These things are just going to be a complete disaster.”

  7. El Cheapo says:

    FYI… just moved over 40K to HSBC w/in the past few weeks.

  8. FredFan says:

    As of this Wednesday, there were several headhunters trying to recruit over 25 consultants to continue a bank secrecy act look-back that the bank had stopped in April when it first realized that it could either continue to open its doors, or pay hundreds of thousands of dollars each week for consultants. It is amazing that the OTS had them restarting this crazy exercise in the midst of their liquidity crunch. It’s amazing how stupid these regulators really are.

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