Sunday, March 22, 2009

Failed bank sues FDIC

In a slap in the face to American taxpayers, Washington Mutual Inc has sued the FDIC for $13 billion dollars. We should file criminal charges against the officers of these failed banks. Perhaps we could teach them some humility.
Washington Mutual sues FDIC for over $13 billion

NEW YORK (Reuters) - Washington Mutual Inc, the failed U.S. savings and loan, has sued the Federal Deposit Insurance Corp for well over $13 billion in connection with the loss of its banking operations, which was acquired by JPMorgan Chase & Co.

In a complaint filed with the U.S. District Court for the District of Columbia, the thrift's former parent accused the FDIC of having on January 23 made a "cryptic disallowance" of its claims, prompting the lawsuit.


Anonymous said...

File criminal charges? What is the crime?

Bluegrass Pundit said...

"Steel Phoenix said...

File criminal charges? What is the crime?"

Accounting fraud? They lost trillions unexpectedly to their stockholders. The financial statements have to be cooked.

Anonymous said...

It certainly bears looking into. At the very least they seemed to be leveraged well beyond what was allowed.

I hear a lot of demand for stringing up the bankers. I'll reserve judgment until I see a specific law broken.

Anonymous said...

FBI is investigating Wamu management and if they are found guilty of corruption, they should be sent to jail.

However, this law suit against FDIC must prevail because Sheila Bair is out of control and she also needs to be investigated.

This is why we need better regulators and why Congress must watch how
these people spend our hard earned tax money.

Now that FDIC has received Congressional approval for an increase to
borrow up to at least $100 billion and again started advocating the
aggregator, or bad, bank idea, I feel it is important to re-examine
FDIC's inconsistent and irresponsible actions as well as their
consequences during this economic turmoil. I believe this agency has
made several decisions detrimental to the US financial market today
and I want to explain why.

What is FDIC? "The Federal Deposit Insurance Corporation (FDIC) is an
independent agency created by the Congress that maintains the
stability and public confidence in the nation’s financial system by
insuring deposits, examining and supervising financial institutions,
and managing receiverships... The FDIC treats all employees, insured
financial institutions, and other stakeholders with impartiality and
mutual respect."

Im a Wamu shareholder so let's begin with this "biggest bank failure"
in history. According to Sheila Bair, Wamu was facing intense
liquidity pressure. OTS and FDIC decided to seize the bank and sell it
to JP Morgan so deposits could be saved. In addition, this was done on
a Thursday instead of the normal Friday because there was a press leak
and Bair did not want to have a bank run.

But how did FDIC determine Wamu was in so much trouble that this
seizure had to happen immediately? Wamu wasnt even on its problem bank

Besides, "Washington Mutual had a Tier 1 capital ratio of 8.4percent
on Sept. 30, well above the 6 percent threshold that regulators use to
classify a bank as well capitalized. JPMorgan Chase (NYSE: JPM), which
purchased WaMu had a similar ratio of 8.9 percent. Wachovia... had a
capital ratio of 7.5 percent as of Sept. 30, compared to Wells Fargo’s
8.6 percent. And National City had an 11 percent capitalratio, and yet
had to sell out to PNC Financial Services (NYSE: PNC). By comparison,
Bank of America (NYSE: BAC), considered one of the bedrock financial
institutions, had a capital ratio at the end of the third quarter of
7.6 percent."

In addition, "Washington Mutual, which already essentially 'went
under' by nature of forced acquisition, has a tangible book/asset
ratio of 3.66. And that number is on the higher end of the scale/list.
So, the thinking would be that many of the institutions with ratios
lower than that could potentially be in trouble as well.

The US banks & their tangible book/asset ratios:

BB&T (BBT) 6.86
PNC (PNC) 5.87
Northern Trust (NTRS) 5.51
Goldman Sachs (GS) 4.86
Morgan Stanley (MS) 4.35
JPMorgan (JPM) 3.83
Washington Mutual (WM) 3.66
Wells Fargo (WFC) 3.50
Merrill Lynch (MER) 2.84
Bank of America (BAC) 2.83
US Bancorp (USB) 2.74
Lehman Brothers (LEHMQ.PK) 2.39
Citigroup (C) 1.52"

Most importantly, Washington Mutual Holding, Wamu's parent company,
had over $4 billion in cash. Is that not enough to keep Wamu
functional for a few more days as the bailout was being voted in

We know Bear Stearns and Wachovia had approached the government for
financial assistance but did Wamu? Without a doubt Wamu management was
corrupt and made many poor and shady business decisions, contributing
significantly to its downfall. As the mortgage crisis became more
drastic, it engaged Goldman Sachs to shop for a buyer. Here was the
strange thing, less than 2 weeks before FDIC seized Wamu Goldman
actually upgraded Wamu; it "took the thrift off its "Americas Sell"
list and said even though losses "continue to deliver body blows to
the bank, the equity base is absorbing the pain.""

The question was, could Wamu's books have deteriorated so much in just
two weeks, or did Goldman miscalculate its recommendation?

Things got even worse after this seizure because FDIC basically killed
the bond market.

"Washington Mutual Inc. bondholders are likely to lose most of their
money after the thrift was seized in the largest U.S. bank failure in
history... It seems that WaMu's major debt holders have been stranded
by regulatory intervention... The deal structure seems to be
unprecedented in that it excludes bondholders at the holdco and bank
levels from the major assets and liabilities of the operating bank.''"

Banks were now having an even harder time raising capital via this
common method (selling bonds). Wachovia became the first casualty as a
result of this repercussion.

"The first thing that happened this morning: credit-default swaps blew
out on Wachovia... Wachovia bondholders are wondering if they're
next," Sauter said. Translation: options on Wachovia bonds showed
confidence in the securities had collapsed. "Wachovia is on the ropes
now because their financing costs are going through the roof. It's an
absolute reaction against how FDIC sold WaMu," Sauter said.""

"At 4 a.m., Bair told Steel that the FDIC had chosen Citi to buy most
of its operations, turning down a Wachovia proposal to stay
independent with government help, according to the filing" Instead,
"FDIC pushed both sides to make an announcement on Monday, Sept. 28,
before the markets opened or Wachovia would be seized."

"Wachovia saw its share price plummet 90% to below 70¢ when Wall
Street opened today. Federal regulators helped to arrange a deal in
which Citigroup will take on $42 billion (£23 billion) of losses on a
$312 billion pool of loans held by Wachovia, which has a portfolio of
risky mortgages."

Here was another questionable act by Sheila Bair and her agency. How
did FDIC determine Citigroup was strong enough to rescue Wachovia?
This choice made no sense because Citigroup itself needed a huge
bailout just a month later.

"Under the plan, Citigroup and the government have identified a pool
of about $306 billion in troubled assets. Citigroup will absorb the
first $29 billion in losses in that portfolio. After that, three
government agencies -- the Treasury Department, the Federal Reserve
and the Federal Deposit Insurance Corp. -- will take on any additional
losses, though Citigroup could have to share a small portion of
additional losses... In addition, the Treasury Department also will
inject $20 billion of fresh capital into Citigroup. That comes on top
of the $25 billion infusion that Citigroup recently received as part
of the the broader U.S. banking-industry bailout."

Bair had boasted that the deal between Wamu and JP Morgan would "not
cost taxpayers a dime."

Yet in this next transaction between Wachovia and Citigroup she
changed her mind and decided it was reasonable to absorb over $200
billion in losses using tax money?

Since then, FDIC moved quickly and began seizing troubled banks one
after another. It also started backing bank bonds because “It would be
very costly” for banks to issue the debt without the guarantee." “Bank
of America Corp., Goldman Sachs Group Inc. and the financing arm of
General Electric Co. led $29.8 billion of FDIC- backed bond sales...
companies began using the FDIC’s Temporary Liquidity Guarantee Program
on Nov. 25..." Such guarantee by FDIC even expanded internationally:

"Morgan Stanley Sells FDIC-Backed Bonds in Hong Kong Dollars"

Now what was wrong with this picture? FDIC is supposed to guarantee
only deposits. Considering its reserve only had a few billions
covering trillions in US deposits, why did it get involved with bond
sales, not to mention it was FDIC's action on Wamu bondholders in the
first place that basically destroyed the bond market?

Not only that, Sheila Bair had devised a loan modification plan to
share losses and she pushed hard to get that program implemented.

"FDIC Chair Sheila Bair... outlined her ballyhooed plan to prevent an
estimated 1.5 million foreclosures by the end of 2009. She plans to
accomplish this feat by modifying more than two million loans at what
she estimates would be a taxpayer cost of $24 billion... FDIC wants to
offer private loan servicers a new incentive to modify troubled
loans... FDIC would pay servicers $1,000 for every loan they modify,
and taxpayers will share the losses if loans re-default... the White
House estimates Ms. Bair's plan could cost as much as $70 billion next
year -- not $24 billion"

Is that FDIC's responsibility too? Because I do not see it mentioned
anywhere on its website. Furthermore, was this program even effective?
Not according to this article:

"Foreclosure filings in the U.S. climbed 30 percent in February from a
year earlier as the worsening economy thwarted efforts by the
government and lenders to prevent homeowners from losing property,
RealtyTrac Inc. said."

In the meantime, since FDIC has been so busy expanding its
jurisdiction, towns across the US suffered as a result of continuous
bank seizures and more importantly, the painfully slow followup.

In Galena, Missouri, "Construction at the resort property is at a
standstill and Shirato is still waiting for a first mortgage to be
returned to Columbia Bank in Kansas. The FDIC put the bank in
receivership in August... Shirato is expecting the FDIC to make a
decision soon so work can start. “I’ve heard it so many times from the
FDIC. We have a process to go through. We were originally told 30 to
60 days,” Shirato said. “It took us six weeks before we could get
anyone from the FDIC to talk to us. We’ve had to let workers go
because we can’t pay them.”

In Augusta, Georgia, a news article detailing "how FDIC and Government
actions are bankrupting people and contributing to unemployment" was

"Late last week a call from FDIC brought news that the FDIC has
decided to foreclose on the White's Building, a project that up until
the time of the bank's failure had been in good standing with its
lenders and subcontractors... In less than 90 days the bank failure
and FDIC incompetence have turned this project into a non-performing
mess and nearly bankrupted our company and me personally... During
this time the developers have been keeping the lights on by using
funds from their personal savings and home equity loans in the hope of
saving the project. They had made Augusta their home, a town that
embraced them as one of their own and provided them such warmth that
they were happy to give up all they had to this project."

"Loudermilk accuses FDIC representatives of everything from
indifference to incompetence... Loudermilk says he has found three
separate lenders willing to buy the loan from the FDIC, yet the agency
is unwilling to work with him, reportedly because it would violate
procedure and could possibly look like favoritism... Instead of taking
one of the offers, the FDIC will most likely put the loan in a pool of
non-performing loans and sell it for far less on the dollar, which,
according to Griffin, is just being lazy"

And by the way, so much for the effectiveness of Wamu rescue by FDIC
and JP Morgan. FDIC could have just issued a statement that all
deposits were safe to combat any further Wamu bank run.

"JPMorgan to Cut 2,800 Jobs at WaMu, Total to 12,000"

Instead of power grabbing, FDIC should be helping these people with
all its resources. It should focus on assisting troubled banks in the
best interest of all parties involved, like it was mandated to do so
by the government. Check out this list. All the capital Goldman Sachs,
JP Morgan, and others raised by selling FDIC- backed bonds could have
been used to save of some of these financial institutions. Besides,
why would Goldman or JP Morgan need this assisted injection of capital
in the first place? They have repeated over and over again that they
were financially sound!

FDIC is supposed to stabilize the financial system. Sheila Bair
herself said she was afraid of a Wamu bank run so she had to act
immediately. So why was she creating a panic by declaring FDIC could
be insolvent before the end the year and therefore it was necessary to
raise bank fees? What was so different about FDIC between now and last
year? Did she not realize her statement could have caused the biggest
bank run in US history? In fact, within just a few days Bair made
several contradictory statements regarding FDIC's potential insolvency
and her concern for using taxpayers money as a solution to that

March 4, 2009
"No Taxpayer Funds Bair rejected arguments that the agency should use
government aid to rebuild the fund. The FDIC has authority to tap a
$30 billion line of credit at the Treasury Department and legislation
pending in Congress would boost the amount to $100 billion.“Banks, not
taxpayers, are expected to fund the system,” Bair said. Asking for
taxpayer support “could paint all banks with the ‘bailout’ brush.” "

March 6. 2009
"The Federal Deposit Insurance Corp. may reduce an emergency fee on
banks to bolster reserves if Congress expands the agency’s borrowing
authority with the Treasury Department to $100 billion, Chairman
Sheila Bair said"

March 9, 2009
"Bair said the FDIC had enough money in its industry-funded reserves
and was fully backed by the U.S. government. "The money will always be
there," she said. "We can't run out of money.""

So the money has always been and will always be there, right? There is
no way the US government would ever not give FDIC enough backing to
ensure consumer deposits are 100% safe.

Coincidentally, the House voted and passed a bill raising FDIC's
borrowing limit to $100 billion from $30 billion at the same time. In
addition, introduced in the Senate by Chris Dodd, with the Fed,
Treasury, and Congressional approval that credit line can increase up
to $500 billion. Does this even make sense? Her original decision to
uniformly raise charges on all banks, including the smaller but
responsible ones, would net her about $27 billion this year. Thus the
most increase she should have asked Congress for was $27 billion,
making the total drawing power at $57 billion. Where did that $100-
$500 billion number come from?

What is even more troubling is how FDIC plans to use that money. The
Congress should have known better and stipulated that this money must
only be used to protect bank deposits. Instead, it looks like we now
may have another Hank Paulson with billions to spend, courtesy of some
of these gullible Congressional leaders.

It is pathetic that so many elected officials failed to take into
account of the fact that "when Bair was the head of the CFTC, and
there was an intense debate over whether more regulation of
derivatives was needed, here's what Bair had to say (from an October
1993 Bloomberg article): THE Commodity Futures Trading Commission
(CFTC) has given the US$ 4.8 trillion derivatives market a clean bill
of health, saying that fundamental changes in the way the market is
regulated are not needed.... "We have a strong affinity for
derivatives at this agency," said acting CFTC chairman Sheila Bair.
"We like them.""

Worse, here is what FDIC feels about the bad bank idea. "FDIC says
U.S. toxic asset plan means taxpayer profits." It would be beyond
ridiculous if our Congress actually believes this assesement, coming
from the same individual who liked derivatives and who believed
Citigroup was strong enough to rescue Wachovia.

It is time for a change, a change for a better and more intelligent
regulator. We need someone who actually understands FDIC's role and
executes its responsibilities in a prudent and impartial manner. We
need someone who really cares about stabilizing banks and who acts in
the best interest of all parties involved. Add up all the amount of
bond FDIC is backing to Wachovia's 90% drop in share price to Wamu's
seizure resulting in job losses and savings and investments, you can
see how much confidence and trust we have placed in our financial
institutions were lost because of FDIC actions.

After all, "when we're putting that kind of money into the banks to
keep them solvent, why is the FDIC taking billions out?"

Update- Maybe this is why Senator Chris Dodd recently introduced a bill to further increase FDIC's borrowing power to $500 billion; its not for deposit protection, not for more bank failures, but most likely to fund Geithner's "legacy asset" plan.


Anonymous said...

"n a slap in the face to American taxpayers, Washington Mutual Inc has sued the FDIC for $13 billion dollars. We should file criminal charges against the officers of these failed banks. Perhaps we could teach them some humility."

And maybe we should just kick the shit out of an idiot like you. Bair, Paulson, and Jamie Dimon conspired to bring down WAMU, so Dimon could obtain it for a pittance. Hopefully, that will be rectified soon. To you LOSERS who parrot the official line, and never bother to do real DD, YOU'RE the ones who come off looking like complete ASSES!