The nationalisation of banking

I wake up this morning to hear of a $16 billion bailout for Fortis, an asset stripping sale of Bradford & Bingley (B&B) to Santander with their mortgage book taken over by the government, and confirmation of  $700 billion bailout of banks in the USA and firesale of Washington Mutual (WaMu).

Add these names to Freddie Mac and Fannie Mae’s effective nationalisation, something unthinkable a few months ago, alongside Lehman Brothers, Merrill Lynch and HBOS, and it’s been a funny old month hasn’t it?

It’s not worth commenting on all of these developments, as it would take too long and it would be too darned depressing, but the question should be why did these banks need rescuing?

Several of them had adequate Tier 1 Capital coverage, B&B at 9.9%, and so it makes Basel II and the Capital Requirements Directive seem redundant doesn't it?

Equally, several of these banks had plenty of liquidity cover, and yet they still went bust.

So what went wrong?

Is this the final explosion of those ‘weapons of financial destruction’, derivatives, or is something else going on?

I think something else is going on.

It is called a fundamental loss of confidence in the banking system.

The story of WaMu illustrates this well.

WaMu is a bank that had huge respect for their innovations in the early 2000’s, especially the launch of the new Occasio branch concept.

This concept revolutionised branch banking in America and globally, on the basis of open plan schemes with accessible tellers – no windows or barriers between cashier and customer – as well as bright colours, child-friendly zones and dress-down banking.

It worked and WaMu is thought of as a friendly bank.

However, like Britain’s building societies that relied on mortgages and savings as their core business, WaMu is a thrift.

Mortgages is core business.

That’s why WaMu had $176 billion worth of mortgage related assets on their books.

For this reason, investors and savers lost confidence in WaMu.

Gradually, as market uncertainties and media coverage made anything with ‘mortgage’ written on it appear toxic, WaMu became the victim of the crisis of confidence. Its credit rating was downgraded and, gradually, the bank’s stock was reduced to junk status

With everyone thinking that the ‘subprime crisis’ means mortgage exposures, which is not far from the truth, investors leave the sinking ship first.  Then savers and depositors follow, and start taking money out of the bank because they read it has 'large mortgage exposures'.

WaMu is one of those banks.

In eight days, from 16^th to 24^th September, customers took out $16.7 billion in deposits, or 10 percent of the total deposit base of the bank. They’re frightened out there, and the media, the bloggers and the commentators were giving them the hee-bee gee-bees.

That’s why the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision, stepped in and said this bank was ‘unsound’.

As a result, it was given to Jamie Dimon for a bargain lot firesale amount of $1.9 billion.  That's good business for JPMorgan and Mr. Dimon, and follows on his $2-per-share ($236 million) purchase - rising to $10-per-share later - of Bear Stearns earlier this year.

  And yet this was a bank with $32.8 billion of assets and $8.1 billion of debts.

It was sound.

I spoke to one of the bank’s staff over the weekend and they are mad, angry, frustrated and sore. They think Jamie Dimon is the devil, buying up a bank at its weakest point for a bargain amount and feasting on their remains. They think the FDIC has given the bank to JPMorgan and not given a damn. They really are fed up with the fact that JPMorgan get all of the bank’s good business – the branches, the cards, the deposits – whilst leaving and bad business and liabilities behind.

Source: FT.com

Seems like a good deal for JPMorgan, and that's what sorts out winners and losers.

The FDIC did this because everyone is frightened out there, including the FDIC.

Anything with mortgage on it, is bad business they think.

That’s why the Treasury, Fed, ECB, Bank of England and all other authorities are going: “oh sh*t, what do we do?”

Nationalise the banking system.

And that’s what they’re doing.

Meantime, any bank with access to liquidity - Wells Fargo, JPMorgan and Bank of America - will sweep up the crumbs from the table that have the juiciest icing on the cake.

Good luck to 'em, I say.