Thursday, October 02, 2008
Epic Fail
So, the world banking economy has fallen apart.
The financial markets experienced extreme turmoil in the last week, led by the sale of Washington Mutual to Chase and Wachovia to Citibank. As a result, the United States now has four major banks, adding to the credit crunch now experienced by borrowers.
Clearly, the Valley has played a big role in the eventual demise of Wamu and Wachovia, and by extension, assisted in the world market drop. Washington Mutual, a major "thrift" bank from Seattle, had been around since the turn of the 20th Century, ironically stating on its website that Wamu made its first acquisition in 1930 when it acquired financially distressed Continental Mutual Savings Bank. Wamu expanded greatly in the 1990's, including acquiring American Savings Bank of Stockton and the Great Western Bank of Chatsworth/Los Angeles. Wamu also bought Providian, from San Francisco, one of the major credit card providers.
Wamu's inheritance of the American Savings Bank holdings included a headquarters building in downtown Stockton. However, the bank's administrative presence in Stockton had been on the decline for years. Recently, the City of Stockton began making plans to make the Washington Mutual building the new city hall.
Meanwhile, Wachovia has recently made an aggressive move into the Valley. In fact, even at this writing, Wachovia/Citi is working on opening new branches here. Wachovia's past in Northern California has been extensive. The purchaser of Wachovia in 2001, First Union shed its name to take on the moniker of its acquisition. Previously, First Union had tripped up with problem-filled genesis when two North Carolina banks merged. Also, First Union had purchased the Money Store, know well in the Valley as it was headquartered in West Sacramento's ziggurat. Two years after the purchase, the Money Store was shuttered at a loss of $1.7 billion.
Financier's believe the bulk of Wachovia's troubles came after the purchase of Golden West Financial/World Savings Bank. Golden West was involved extensively in high risk mortgages throughout California, many of it's loans going to homeowners in the Valley. In 2006, Fortune magazine named Golden West the "most admired company" in mortgage services. Apparently, Fortune has something akin to the infamous "Sports Illustrated cover jinx."
These banks, and really the rest of the finance industry, made it commonplace to loan to suspect borrowers, or to extend too much credit to borrowers that would clearly have been better served with a more modest loan. While borrowers could have certainly made it work with $200,000 fixed rate loans, lenders got creative, and allowed customers to fall into the trap of unsustainable payments with adjustable rate loans of tens to hundreds of thousands more. This drove up the median price of houses, creating an even larger customer base that would have to accept adjustable rate mortgages to own a home or borrow against their home.
When interest rates eventually rose (who would have thought over the length of a 30 year loan that rates would go up?), massive numbers of borrowers could not continue to pay. Lenders like Wachovia and Washington Mutual had a huge inventory of repossessed homes, with an inability to sell at previously inflated prices, while also being unable to keep up the charade that adjustable rate mortgages would be a safe investment for future homeowners. There seemed to be no way to climb out of the hole they had dug themselves into. They had no recourse, setting up Wamu's public seizure and sale to Chase last week.
Are there any lessons in this? Who knows. It seems that in capitalism, some companies will always seek short term gains rather than long term stability. Our financial system requires ever growing dividends for stock holders, who rail against the sometimes reasonableness of stagnant growth. In a way, we are doomed to repeat the failures of today's financial systems. It may take another form, in another industry, but shaky investments and an avoidance to recognize the worst case scenario will return again. Plus, we are not yet into the clear.
Labels: Chase JP Morgan, Citibank, Stockton, Wachovia, Washington Mutual, West Sacramento
