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Economic Environment Surrounding the Seizure.
The seizure of WMB was preceded by months of generalized anxiety across the financial markets and weeks of financial turmoil. Commonly attributed to deterioration in the housing market in 2006, the decreasing financial condition of the US economy prompted the government-backed sale of Bear Stearns to JPMorgan in March , the closure of IndyMac by the OTS in July , and the placement of both Fannie Mae and Freddie Mac into conservatorship in the first week of September.
http://www.fdic.gov/bank/individual/failed/IndyMac.html
http://newsroom.bankofamerica.com/index.php?s=press_releases&item=8255
The week of September 15th, the financial turmoil began to
develop into a crisis. During the previous weekend, Federal Reserve
and Treasury officials had concluded that the investment bank of “Lehman
Brothers was probably insolvent”.
http://www.treasury.gov/press/releases/hp1147.htm
Treasury secretary Henry Paulson was concerned with “moral
hazard”, or the thought that companies would take too many risks if
the government were to bail them out.
Based on this decision, buyout negotiations involving Lehman
Brothers were suspended, and the company was forced to seek Chapter
11 bankruptcy protection.
http://online.wsj.com/article/SB122132019771832253.html
As a consequence of this filing, the Reserve Primary Fund
money market fund encountered “a wave of redemptions”.
On the following day, September 16th, the Federal Reserve
loaned AIG $85 billion to support the troubled insurer while the Reserve
Primary Fund, due to a wave of redemptions worried about their Lehman
exposure, was forced to break the buck with the price of its shares.
http://www.house.gov/jec/Research%20Reports/2008/rr110-25.pdf
These two events seemingly exacerbated the developing financial
crisis as investors shifted money market assets from funds backed by
commercial loans to funds backed by treasuries and other government
bonds, creating liquidity problems for institutions that dealt with
commercial paper and increasing overnight borrowing costs.
On September 18th, talks began in Washington on the details
of a 700 billion financial bailout plan.
http://www.treasury.gov/press/releases/hp1147.htm
Additionally, institutional money managers reportedly sought
to “redeem another $500 billion” from money market funds, but only redeemed
105 billion after Secretary Paulson intervened.
http://www.treasury.gov/press/releases/hp1147.htm
This was followed on September 19th with the Treasury announcing
a program to guarantee $1.00/share of participating money market funds.
It was in this environment of generalized financial panic,
ever-decreasing credit markets, and heated political debate over the
proposed bailout legislation that Washington Mutual Bank was seized
by the OTS on September 25th.
3/16/08: JPMorgan purchases Bear Stearns
7/11/08: Indymac closed by OTS
http://www.fdic.gov/bank/individual/failed/IndyMac.html
7/21/08: SEC bans “naked” short selling in certain financial stocks.
Washington Mutual is not included on the list.
http://www.sec.gov/rules/other/2008/34-58166.pdf
http://www.mortgagenewsdaily.com/7222008_Short_Sell_Banks.asp
9/7/08: Fannie Mae and Freddie Mac placed into conservatorship.
http://newsroom.bankofamerica.com/index.php?s=press_releases&item=8255
9/13/08 - 9/14/08: Meeting of financial executives, Federal Reserve
and Treasury officials meet with executives of several top financial
firms.
Federal Reserve and Treasury officials conclude that “Lehman
Brothers was probably insolvent.”
http://www.treasury.gov/press/releases/hp1147.htm
9/15/08: OTS cites as the beginning of 16.7 billion in outflows from
WMB
http://www.fdic.gov/news/news/press/2008/pr08056.html
Lehman Brothers Holdings Inc. files
for bankruptcy
http://online.wsj.com/article/SB122132019771832253.html
Bank of America acquires Merrill Lynch after failed negotiations
to buy Lehman Brothers due to Federal Reserve and Treasury making “it
clear that the federal government would not assist any buyers of Lehman
Brothers.”
http://online.wsj.com/article/SB122156561931242905.html
http://www.treasury.gov/press/releases/hp1147.htm
Reserve Primary Fund money market mutual fund is hit with
“a wave of redemptions” due to Lehman exposure.
9/16/08: Federal Reserve lends AIG 85 billion.15 Reserve Primary Fund
“breaks the buck”.
9/17/08: SEC bans “naked” short selling of all stocks.
http://www.sec.gov/rules/other/2008/34-58572.pdf
“For the week ending
on Wednesday September 17, 2008, investors reportedly redeemed $145
billion from their money market mutual funds.”
http://www.treasury.gov/press/releases/hp1147.htm
Investors begin to shift from money market funds backed by
commercial loans to funds backed by treasuries and other government
bonds, creating liquidity problems for institutions that deal with commercial
paper and increasing overnight borrowing costs.
Bernanke reports that
“[t]he resulting outflows threatened the stability of short-term funding
markets, particularly the commercial paper market, upon which corporations
rely heavily for their short-term borrowing needs.”
9/18/08: SEC bans short selling of 799 financial companies, including
Washington Mutual.
http://www.sec.gov/rules/other/2008/34-58592.pdf
Talks begin in Washington on a financial bailout plan. Institutional
money managers reportedly seek to “redeem another $500 billion” from
money market funds, but only redeem 105 billion after Secretary Paulson
intervenes.
Bernanke and Paulson
begin discussing proposal for 700 billion bailout plan with congressional
leaders.
http://www.treasury.gov/press/releases/hp1147.htm
9/19/08: The Treasury announces a program to guarantee 1.00 per share
price of participating money market funds.
9/20/08: President Bush requests 700 billion bailout plan.
9/25/08: WMB seized
9/26/08: Legislators fail to reach a deal on the 700 billion bailout
plan
9/28/08: Tentative deal announced
9/29/08: Bailout vote fails in the House; Citi agrees to purchase Wachovia
10/1/08: Senate passes 700 billion bailout package
10/3/08: House passes bailout plan, which is signed by President Bush;
Wells Fargo buys Wachovia.
10/10/08: FDIC officially approves insurance limit increase to 250,000
included in bailout plan.