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WaMu’s Memorandum of Understanding

All eyes have been on the Treasury Department taking Freddie Mac and Fannie Mae into conservatorship this week but Washington Mutual [3] 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 [4]). 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 [5], 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 [6] 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 [7])