Washington Mutual Failure

1 January 2017

Failing in business isn’t fatal. It’s often a precursor to success. It’s not uncommon for successful entrepreneurs to fail before achieving success. During turbulent economic times, such as now, we can easily find ourselves shifting the blame for the failure of our businesses to factors outside of our control. Similarly in economic boom times we can find ourselves being quite proud of the results we achieve almost without having a clue as to how we have accomplished them.

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This somewhat hypocritical approach to business can be very dangerous. In order to ensure the future growth and sustainability of our businesses we have to be honest about what we are doing right and what we are doing wrong. Seattle-based Washington Mutual, Inc. (WaMu), one of the nation’s leading financial services companies, is the outgrowth of a demand to rebuild its home city after a devastating late 19th-century fire. Since then the company has transitioned from a building loan to a mutual bank. Until the 1960s, the company operated solely in the Seattle area.

Then, an acquisition drive during the 1990s propelled Washington Mutual to the top ranks of U. S. home mortgage makers. Faced with a steady downward pressure in the sector at the midpoint of the first decade of the 2000s, Washington Mutual has redirected its attention to its retail banking business. The financial turmoil in the United States has claimed Washington Mutual, on its 119th year anniversary and is being called the biggest banking failure in American history. The United States regulators have seized and sold some of Washington Mutual’s assets to JPMorgan for nearly two billion dollars.

This seizure and sale is an attempt to clean up the banking industry filtered with toxic mortgage debt. Washington Mutual had insufficient liquidity to meet its obligations and was in an unsafe and unsound condition to transact business; the government had no choice but to step in. The birth of the financial institution responsible for forming Washington Mutual, Inc. occurred after the near-death of the city. On June 6, 1889 a glue pot in the basement of a downtown building boiled over engulfing the downtown district in flames.

In total, 25 city blocks, 120 acres, including the heart of the city were destroyed. It was time for the city to form a new financial institution, one created specifically to help the rebuilding of the city of Seattle. On September 25, 1889 Washington National Building Loan and Investment Association filed articles of incorporation offering its stockholders a safe and profitable means for investing and lending.

On June 25, 1908, the company changed their name to Washington Savings and Loan Association and in 1911 Eugene Favre, co-founder of Murphy Favre, Inc. became a member of the board marking the start of a relationship between the investment firm and Washington Mutual. During World War I, Washington Mutual expanded its assets by 68 percent, escaping the impact of the recession that followed. The company emerges from the war with the reputation as the strongest savings and loan institution in Washington. Deposits increased strongly from $15 million in 1921 to more than $26 million two years later. The Wall Street stock market crash of 1929 gave way to a decade long economic depression that brought devastation for the U. S. banking industry.

The years were difficult but Washington Mutual persevered avoiding any financial ruin. BY the end of the 1930’s, Washington Mutual had nearly 100,000 depositors and was about to benefit once again from the economic growth brought about by the century’s second great military struggle. During World War II, Washington Mutual sold nearly $30 million in war bonds. In 1941, the bank merged with Coolidge Mutual Savings Bank, increasing its resources to more than $77 million and its deposits were more than $72 million. Washington Mutual did not move outside the greater Seattle area until1964.

Five Washington Mutual offices branches were established in the Seattle area between 1955 and 1961. From 1964 forward, the geographic expansion extended the bank’s presence throughout Washington. Between 1965 and 1973, the bank opened 15 branch offices in the Seattle area and in regions across the state. This proved to be a catalyst for the Washington Mutual’s animated growth through and during the 1990’s. IN 1991 Washington Mutual ranked Washington’s largest independently owned financial institution with $8 billion in assets and 84 financial centers and 17 home loan centers in its ome state, Oregon, and Idaho.

Between 1991 and 1995, Washington Mutual’s profits more than double going from $80. 6 million to $190. 6 million, its deposits increased from $5. 4 billion to $10. 6 billion, and its assets swelled from $8 billion to $21. 6 billion. The number of branch offices operated by the bank had increased to 248 financial centers and 23 loan centers by the end of 1995. In July 1996 Washington Mutual completed the largest acquisition in its 107 year history. Washington Mutual acquired a $1. billion American Savings Bank, nearly doubling its size, making it the third largest savings and loan in the United States.

The core values of Washington Mutual were to be fair. our actions matched our words, to be caring; we speak candidly and listen openly, to be human; we celebrate our successes and learn from our failures, to be dynamic; we are never satisfied with the status quo and know that we must continually reinvent our organization and ourselves, and to be driven; we set high, measurable goals and hold ourselves accountable to achieve them.

The vision of Washington Mutual was “To be the nation’s leading retailer of financial services for consumers and small businesses. ” The mission statement for Washington Mutual was “To build strong, profitable relationships with a broad spectrum of consumers and businesses. We will do this by delivering products and services that offer great value and friendly service, and by adhering to our core values of being fair, caring, human, dynamic, and driven. ” Washington Mutual combined banking and friendly customer service in a welcoming retail environment.

The concept represented the innovative approach to retail banking combining a variety of elements to create an inviting customer experience. The company institutes The School Savings program which was introduced to help teach children the value of saving money; on March 13, 1923, the first School Bank Day almost 17,000 children made deposits. Washington Mutual offered WaMu Free Checking account and online banking to personal loans, WaMu’s Retail Banking and Financial Services business offers a comprehensive line of deposit and other retail banking products and services to consumers.

The company also offered products and services to small businesses and assists them with payroll, cash management, and retirement planning. (WaMu). WaMu Investments, Inc. is a full service brokerage that specializes in helping individuals meet their financial goals. The company offered a broad range of investment products, including individual retirement accounts (IRAs), fixed annuities, life insurance, stocks and bonds as well as retirement and estate planning. (WaMu). WaMu was one of the nation’s leading home mortgage lenders.

In 2006, they funded more than $150 billion in home loans for individuals and families across the nation. They offered some of the most competitively priced and desirable products in the industry. (WaMu). WaMu also made insurance products available to customers that compliment the mortgage lending process including private mortgage insurance and mortgage life insurance, as well as flood, homeowners’, earthquake and other property and casualty insurance. (WaMu).

WaMu offered commercial real estate property owners and investors great value with competitive pricing and quick, reliable processing. WaMu). WaMu card service was a leading provider of credit cards to middle market consumers throughout the United States. Washington Mutual combined experience, analysis, technology and outstanding customer service and looked to build long lasting relationships with customers by providing products and services that met their evolving financial needs. (WaMu). Washington Mutual posts its biggest loss ever. Its stock prices fell to just over $3. 00 in mid July which is roughly 65% less than the $8. 75 a share previously paid.

The cost to insure the company’s debt rose to a record high which is a sign that investors are becoming nervous about the company’s ability to pay back its loans. Washington Mutual had $44 billion of debt that was due this year and $43 billion due between 2009 and 2014. In early March, JPMorgan Chase sent a letter to Washington Mutual urging them to consider a deal quickly because the environment was becoming worse. Washington Mutual declined, preferring to remain independent. Washington Mutual with $307 billion in assets would be the biggest bank failure in history.

In September of 2008 Washington Mutual had 2,239 branches in 15 states. It had 43,198 employees in June of 2008. On September 25, 2008, 119 years from the birth of Washington Mutual; the U. S. government closed the institution and sold its banking assets to JPMorgan Chase & Co for $1. 9 billion. WaMu was worst hit by the housing crisis and insisted it could remain independent but had quietly hired someone to identify potential bidders but was unsuccessful. Until recently, Washington Mutual was one of Wall Street’s strongest performers; reaping profits quarter after quarter.

The 2008 financial crisis is affecting millions of Americans and is one of the hottest topics in the Presidential campaigns. In the last few months we have seen several major financial institutions be absorbed by other financial institutions, receive government bailouts, or outright crash. So what caused the financial crisis of 2008? This is actually the perfect storm which has been brewing for years now and finally reached its breaking point. Let’s look at it step by step. Market instability

The recent market instability was caused by many factors, chief among them a dramatic change in the ability to create new lines of credit, which dried up the flow of money and slowed new economic growth and the buying and selling of assets. This hurt individuals, businesses, and financial institutions hard, and many financial institutions were left holding mortgage backed assets that had dropped precipitously in value and weren’t bringing in the amount of money needed to pay for the loans. This dried up their reserve cash and restricted their credit and ability to make new loans.

There were other factors as well, including the cheap credit which made it too easy for people to buy houses or make other investments based on pure speculation. Cheap credit created more money in the system and people wanted to spend that money. Unfortunately, people wanted to buy the same thing, which increased demand and caused inflation. Private equity firms leveraged billions of dollars of debt to purchase companies and created hundreds of billions of dollars in wealth by simply shuffling paper, but not creating anything of value.

In more recent months speculation on oil prices and higher unemployment further increased inflation. How did it get so bad? Greed. The American economy is built on credit. Credit is a great tool when used wisely. For instance, credit can be used to start or expand a business, which can create jobs. It can also be used to purchase large ticket items such as houses or cars. Again, more jobs are created and people’s needs are satisfied. But in the last decade, credit went unchecked n our country, and it got out of control. Mortgage brokers, acting only as middle men, determined who got loans, then passed on the responsibility for those loans on to others in the form of mortgage backed assets (after taking a fee for themselves originating the loan).

Exotic and risky mortgages became commonplace and the brokers who approved these loans absolved themselves of responsibility by packaging these bad mortgages with other mortgages and reselling them as “investments. Thousands of people took out loans larger than they could afford in the hopes that they could either flip the house for profit or refinance later at a lower rate and with more equity in their home – which they would then leverage to purchase another “investment” house. A lot of people got rich quickly and people wanted more. Before long, all you needed to buy a house was a pulse and your word that you could afford the mortgage. Brokers had no reason not to sell you a home. They made a cut on the sale, then packaged the mortgage with a group of other mortgages and erased all personal responsibility of the loan.

But many of these mortgage backed assets were ticking time bombs. And they just went off. The housing market declined The housing slump set off a chain reaction in our economy. Individuals and investors could no longer flip their homes for a quick profit, adjustable rates mortgages adjusted skyward and mortgages no longer became affordable for many homeowners, and thousands of mortgages defaulted, leaving investors and financial institutions holding the bag. This caused massive losses in mortgage backed securities and many banks and investment firms began bleeding money.

This also caused a glut of homes on the market which depressed housing prices and slowed the growth of new home building, putting thousands of home builders and laborers out of business. Depressed housing prices caused further complications as it made many homes worth much less than the mortgage value and some owners chose to simply walk away instead of pay their mortgage. The credit well dried up These massive losses caused many banks to tighten their lending requirements, but it was already too late for many of them… the damage had already been done.

Several banks and financial institutions merged with other institutions or were simply bought out. Others were lucky enough to receive a government bailout and are still functioning. The worst of the lot or the unlucky ones crashed. The Economic Bailout is designed to increase the flow of credit Many financial institutions that are saddled with risky mortgage backed securities can no longer afford to extend new credit. Unfortunately, making loans is how banks stay in business.

If their current loans are not bringing in a positive cash flow and they cannot loan new money to individuals and businesses, that financial institution is not long for this world. The Washington Mutual is one of these financial institutions. The idea behind the economic bailout is to buy these risky mortgage backed securities from financial institutions, giving these banks the opportunity to lend more money to individuals and businesses, hopefully spurring on the economy. Credit got us into this mess! Why give more?!? Ironic isn’t it?

Yes, it is true that credit got us into this mess, but it is also true that our economy is incredibly unstable right now, and being that it is built on credit, it needs an influx of cash or it could come crashing down. This is something no one wants to see as it would ripple through our economy and into the world markets in a matter of hours, potentially causing a worldwide meltdown. As I previously mentioned, credit in and of itself is not a bad thing. Credit promotes growth and jobs. Poor use of credit, however, can be catastrophic, which is what we are on the verge of seeing now.

So long as the bailout comes with changes to lending regulations and more oversight of the industry, along with other safeguards to protect taxpayer dollars and prevent thieves from not only getting of the hook, but profiting again, there is potential to stabilize the market, which is what everyone wants. Whether or not it works is to be seen, but as it has already been voted on and passed, we should all hope it does. JPMorgan buys WaMu In the biggest bank failure in history, JPMorgan Chase acquired massive branch network and troubled assets from Washington Mutual for $1. 9 billion.

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