Thursday, September 25, 2008


WAMU, Washington Mutual Bank (founded in Seattle)the US's largest savings and loan one of the country's largest mortgage lenders, was taken over last night by federal regulators (FDIC) and instantly sold to JPMorgan Chase & Co. (No messing about, no competitive bidding; don't underestimate the regulator.) WAMU had assets of $307 billion and deposits of $188 billion, and is the largest traditional bank to fail in U.S. history (only 2% of assets or $6.1bn in losses in 9 months to June 30).
This is adding to the dismay and concentrating minds on clearing the $700bn TARP toxuc assets bailout fund through Congress. The BBC last night reported that the atmosphere in the USA seemed a hundred tmes more charged with anxiety that the UK was at the time of the Northern Rock bank run.
At the same time, over in the other Washington the bipartisan talks fell apart.
Presidential candidate Rep. Sen. McCain sided with House Republicans who now reject outright what the Fed and US Treasury propose and want an insurance based approach that has nothing to do with saving the banking system and only to do with mortgage-holder protection. Meetings reportedly dissolved into shouting matches. This is now make or break for McCain's presidential campaign. He is a self-confessed non-comprehender of economics, but is determined to back the conservative group's plan for Federal (FDIC-like or Fannie & Freddie style) insurance coverage for the half of all mortgage-backed securities that it does not already insure. That Rick Davis, McCain's campaign manager, has been paid roughly $2.5m over 5 years by Freddie Mac & Fannie Mae may be totally beside the point, but became central to the slanging match between Obama and McCain that began with McCain ironically accusing Obama of being advised by overpaid Fannie & Freddie executives who then denied that was the case?
The alternative Republican idea is to extend insurance cover to the half ofUS mortgages not covered by Fannie & Freddie (under Fed administration), meaning another $2tn+ of mortgages. What is the annual premium required for that these days and what will it ne when the only insurance cover buyers are Federal agencies? Deposit insurance rose to 130bp (FDIC cover for $4tn) but deposit risk is less than mortgage risk. Hence, it may not take more than a few years of mortgage insurance cover to absorb more than the $700bn bailout fund while generating no knock-on benefits, and possibly an enormous liability if the Fed has to self-insure its assets.
U.S. Treasury Secretary Henry Paulson and U.S. Federal Reserve Chairman Ben Bernanke, rushed to Capitol Hill late last night to urge House Republicans to get back on track. Assuming the deal goes through as may probably be announced today (though I can't imagine McCain not succeeding in spinning this out until over and past the weekend. He would like to avoid the television debate this Friday, which can only be cancelled if this $700bn deal is stymied at least until then).
To get the deal through may now require the US Fed and Treasury to come clean on the immediate gains to the public finances. When the bailout was first mooted the markets jumped 8% across the board. What happens when the bailout deal is confirmed - maybe a 10-15% jump across the board? I expect the following gains from the $700bn and expect not all of the fund will be employed this year:
For private sector, $650bn gain approx:
- $400bn improvement in banks' asset valuations
- $200bn capitalisation gain via banks' share prices
- $40bn avoided in 1% deposit insurance hike on FDIC's $4tn of insured deposits
For public sector, $530bn gain approx:
- $100bn avoided in 2% deposit insurance premium on insured mortgages
- $100bn 10% gain to AIG's $1tn assets(now Federally owned)
- $ 85bn recover loan to AIG
- $160bn 10% gain to balance sheet of FM&FM $1.6tn assets/ $1.5tn liabilities
- $100bn 15% profit on RMBS etc. bought in by $700bn fund
to which can be added other gains in tax, lower cost of borrowing etc. Therefore, it seems to me that investing $700 billions for public and private partnership gains of $1.2 trillion is suspiciously businesslike!

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