Perry Glasser

WaMu, George Bailey & Fear

In Business, Economics, Economy, Finance, Politics, Wall Street on September 26, 2008 at 12:31 pm

Georgie Bush’s foreign adventures are not enough to save the faltering US economy. After the vain attempt of giving $600 to every taxpayer in America, we are about to print $700 billion in cash to give it to failed Buccaneers and Wizards. The only thing our elected representatives are debating is how to do it.
Washington Mutual was sold to JP Morgan this morning. A run on the bank’s deposits left the Federal Reserve no choice other than to broker the deal, and the House of Morgan stepped up with an open wallet. The alternative was for the Fed to step up with FDIC insurance, costing each of us up to $100,000 per depositor. Yikes!

BANK RUNS

Readers will recall the moment in Frank Capra’s It’s A Wonderful Life when George Bailey’s bank nearly fails. For movie-goers in 1946, the scene depicted recent history. Shortly after the stock market crash of 1929, US banks dropped like rotten fruit from trees in a high wind.
The Wizards and Buccaneers who vie to manage your money trade in fear. By keeping us ignorant of basic financial principals, we make better sheep, willing to pay for what we think is arcane, complicated advice–which it is not.
Illness and old age are terrifying enough, but in America we add the terror of being broke. In a nation devoted to Life, Liberty and the Pursuit of Happiness, we keep our population complacent and productive by making healthcare and comfort in old age a matter of money.
Wizards and Buccaneers remind us of the efficiencies benefits of the markets. These are the same tearful repentant gang members weeping for forgiveness and asking $700 billion in bailout money. Their screw-up; our bankruptcy. This is like having your kid drive the family Toyota off a bridge.
In the 1920s, lightly regulated financial markets pumped up the value of equities far beyond the value of the underlying assets. Land is land is land, but its market value is set by a buyer and seller: nothing has intrinsic value. Not railroads, not gold, not fruitcake, not peanut butter. Not even beer.
The Wizards of the time allowed the Buccaneers of the time to buy huge positions at 90% margin—that is to say, for every dime a speculator put up, he controlled $1 worth of equity. Funny money pursued a limited number of shares of stock. The law of supply and demand kicked in; The Roaring Twenties roared. Stocks soared on imaginary wealth and bathtub gin.
But a few people grew wary. The economy was good, but not that good. They not-so-quietly went to cash out. That reduced demand for stocks. Prices fell. More people grew more wary. The few became many. The many became a torrent. Stocks plummeted.
In the panic of October 28 and 29, 1929, markets crashed.
Does this sound familiar yet?
Soon, far from the canyons of Wall Street, the George Baileys of America who operated thrifts and savings banks saw their depositors line up. They had “demand deposits,” and they made demands.
Only children believe banks keep every dollar in the vault. Banks make money by putting our dollars onto the street in the form of car loans, business loans, and mortgages. They collect a lot; they payout a little; they keep the difference.
The Federal Reserve —which did not exist for George Bailey—sets the ratio of money that must be kept in…well, reserve. That’s cash in the vault. The reserve rate is 10%, and has been for a long time. For every dollar the bank accepts, it can loan $9.
Never forget that the vast majority of what out nation calls money is nothing more than a ledger entry.
Panic was abroad in the land in the early 1930s. The rules and regulation for banking were created during the Hoover and Roosevelt administrations. A good thing, too. The national money supply by 1933 was 40% less than it had been in 1929, and national unemployment was at 25%. The Federal Deposit Insurance Company (FDIC) was created, putting the full faith and credit of the United States behind every depositor’s dollar.

BUCANEERS & WIZARDS

WaMu faced what George Bailey did, and no sweet old lady worked her way to the front of the line with a deposit slip.
In 2008, Wall Street Buccaneers and Wizards have lived high because the regulations have gradually eroded.
Most of that is a good thing. The world changed.
We’ve seen two decades of mergers and acquisitions: Wells Fargo and Bank of America became national consumer banking concerns. US businesses cannot compete in a global economy with consumer banks chartered to do business only in isolated states. Technology has made backroom operations swifter than some guy with a green eyeshade on a high stool with pots of red and black ink could ever hope to be. Small banks merged and grew to become large regional banks such as Huntington and Sovereign.
Every small bank wants to become a big bank. Call it lust; call it vision, call it greed, call it the American Dream.
The buccaneers who run the Seattle-based regional WaMu grew and grew by accepting trusting depositors’ money, putting it out as high yielding uncreditworthy loans (you will never see the word “subprime” here) to real estate speculators and people who just weren’t capable of paying back the many mortgage instruments WaMu offered—balloon payments, interest-only mortgages and the like. Those are more rhetorical dodges created to masquerade products, all of which mean only to “high risk for the lender, steeper and longer payments for the borrower, and shit in the fan for all of us if the price of housing falls.” Bundles of these crap loans were sold to Fannie Mae and Freddie Mac, which to encourage businss created a market for “noncorming” loans. “Nonconforming” means “violating accepted banking practice,” which means “crap.” Those companies made those bundles into even bigger bundles, that they sold to South Korea, China, Dubai, and several other countries enjoying liquidity while US treasure is being used to shell shepherds in Iraq and Afghanistan, the surest way to convert them to be allies of democracy.
When WaMu’s collapse came, it was accelerated by the reserve principal. For every dollar depositors were demanding, the bank had only a dime. Worse yet, the paper it carried on its books as assets was Monopoly money. “Underperforming assets,” is another rhetorical dodge. It translates to “crap.”
If you owned shares in WaMu, I am sorry for you. You were screwed by Wizards and Buccaneers who somehow never saw It’s a Wonderful Life. Look for no angels.
You bring the pitchforks. I’ll bring the torches.

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