Having spent the early part of my professional working career as a Vice-President with Western Savings ; Loan enabled me to experience firsthand the recent collapse of Washington Mutual through different lenses. (According to Dr. Housing), the story begins in the 1920s. Back then, houses typically cost $5,000. Sure doesn’t sound like much until you consider that the average annual income in the US was $1434 in 1925 consequently, few people could afford to pay cash for their homes, just like today. So, people borrowed the money from banks again, just like today. But the loans were structured differently back then.
A common clause in the loan agreement gave banks the right to demand full payment of the loan at any time, if you failed to repay your when asked, the bank had the right to take your house from you and sell it to get its money back. So although the terms called for you to send in a payment every month to pay off the balance over 30 years you knew you suddenly might be required to repay the remaining balance in full at any given time. However, you just didn’t worry about that clause simply because they knew if the bank asks for the balance in full they might as well ask for the moon.
When the stock market crashed, millions of investors lost he sums of money. Problem was it wasn’t their money to lose that they had lost. Back then most investors bought stocks with borrowed money, money lent to them by stockbrokers called, “a margin account. ” Under the rules back then a investor could buy $4100 worth of stock for just $10, the broker would loan you the other $90. When the crash (1929) hit knocking 30% off the value of everyone’s stock portfolio the account was worth only $70. But the investor borrowed $90 to buy them. This led to a, “margin call,” when the broker would tell the investor they had to come up with more cash.
If the investor failed to do so the broker would sell some or all of the investors stock until the margin was met. Consequently, the investor went to the bank (Had to fulfill margin with-in 24 hours) demanding their money. To meet their demands banks started calling loans on mortgages due, because homeowners didn’t have money banks foreclosed and put homes up for sale in a desperate attempt to raise capital. Just like today, it didn’t work. With no one able or willing to buy the houses, the bank where stuck with worthless real estate and subsequently many banks were forced to close their doors.
With investors unable to meet margin calls, brokers begin to sell out their holdings. This song sounds familiar, with a different beat. Washington Mutual is a Savings and Loan Institution or Thrift was founded in Seattle, Washington in 1889. The primarily purpose of Thrifts Banks were to make mortgage with the savings taken in from investors. At the time of Washington Mutual’s inception the city of Seattle was nearly destroyed by a major fire, Washington Mutual was extremely instrumental in helping Seattle‘s economic recovery. The next 50 years Washington Mutual was instrumental in the opening up cash machine networks and phone banking.
Clients where able to access their money through virtual ATMs attached to their phones, also pioneered by Washington Mutual. The company bought Murphy Favre (Brokerage Firm) in 1989 which doubled its assets. In 2005, Washington Mutual purchased Providian (A subprime credit issuer) for 46. 5 billion and the game was on. The housing market imploded n late 2006. This was extremely bad news for a company who originated large amounts of ARM’s (Adjustable Rate Mortgages) loans. Things got progressively worst in 2007; Washington Mutual closed 160 of their 336 home loan offices and let 2600 people go.
In an effort to keep the doors open (as a result of mortgage loans defaults) sound familiar, Washington Mutual obtained billion dollar cash infusion from TPG out of Texas. Additionally, to try and fix the situation Washington mutual created a CD or Certificate of Deposit with a high interest rate of 5% which was more than the national average rate of returns for CD’s at that time. In a 10 day period of time Washington lost $16. 7 billion as a result, investors withdrew their money out of fear of the bank’s failure. Just like before.
This of course caused an extreme liquidity problem that forced the FDIC (Federal Deposit Insurance Corporation) to take over the bank. The primarily responsibility of the FDIC is to protect investors deposits. The company’s high risk mortgage portfolio had no sustainable model. Washington Mutual leadership could have prevented this mess by implementing the following: 1. Never have purchase Providian at the height of the mortgage run 2. Accepted J. P. Morgan offer to purchase the company at ;7 a share prior to Washington Mutual downfall 3. Staying with their core business . Not lending money to individuals who obliviously could not afford the homes Just like before, the impact of Washington Mutual failure will be felt long after the doors are shut from people whom lives will be torn apart. The countless number of jobs lost, the trickle down affect this has on the business impacted by loss of dollars available to be spent in their business. Washington Mutual played significant role in communities across the US with their charity foundation that donated about $50 million dollars per year to local organizations now gone. Just like before.