Senator Bob Corker Needs to Be Updated on His Bank Failure History

Reggie Middleton's picture

sen._corker.jpgSenator
Corker challenged Mr. Volcker's stance in today's congressional
hearings on the Volker Rule by saying that no financial holding company
that had a commercial bank failed while performing proprietary
trading. It appears as if Mr. Cofker may have received his information
from the banking lobby, and did not do his own homework.
Let's
reference the largest commercial bank/thrift failure of the all. First
off, a little historical reference courtesy of WSJ.com:

 WaMu
Is Seized, Sold Off to J.P. Morgan, In Largest Failure in the History
of the US!!!

 In what is by
far the largest bank failure in U.S. history
, federal
regulators seized Washington
Mutual
Inc. and struck a deal to sell the bulk of its operations
to J.P.
Morgan Chase
& Co...

The collapse of the Seattle thrift,
which was triggered by a wave of deposit withdrawals, marks a new low
point in the country's financial crisis...

The seizure was
another watershed event in a frenetic period for the U.S. banking
system, and came while members of Congress wrangled over the Bush
administration's proposed $700 billion bailout package. The tally of
U.S. financial giants that have either been seized by the government or
sold themselves off to stronger firms in recent weeks includes
mortgage titans Fannie
Mae
and Freddie
Mac
, insurer American International Group Inc., and Wall Street
firms Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

The
failure of WaMu eclipsed what had long been America's largest bank
bust on record, the 1984 collapse of Continental Illinois, which had
$40 billion in assets.

The seizure of Washington Mutual is
likely to send tremors through the thrift industry. Many of WaMu's
smaller brethren are also struggling with a wave of bad loans and some
have already been ordered by regulators to raise capital and stop
growing. Many community and regional financial institutions are also
slashing dividends, selling branches and reining in lending in order to
preserve capital...

While WaMu has been struggling since last
year, its demise occurred with breathtaking speed.

Starting
Sept. 15, the day that Lehman filed for bankruptcy protection, WaMu's
customers began heading for the exits. Over the next 10 days, they
yanked a total of $16.7 billion in deposits, according to the Office of
Thrift Supervision. That was about 9% of the thrift's deposits as of
June 30. WaMu declined to comment...

In March, with the credit
crisis in full bloom, J.P. Morgan offered to acquire WaMu but was
spurned in favor of a $7 billion infusion led by the private-equity
firm TPG, considered one of the savviest buyout firms. TPG, led by
investor David Bonderman, said it will lose $1.35 billion, wiping out
its investment....

"Obviously, we are dissatisfied with the loss
to our partners from our investment in Washington Mutual," said a TPG
spokesman. "The unprecedented turmoil in global financial markets and
resulting macro crisis of confidence has radically changed the dynamics
for all financial institutions, and led to widespread losses among
investors throughout the sector." TPG said its losses are about $1.35
billion, wiping out its investment....

Regulators also hustled
to shut down WaMu faster than they have with other failing banks this
year. Normally, when the FDIC and another regulatory agency are
preparing to take over a bank, the FDIC will solicit bids for the bank
on Tuesday or Wednesday and then seize it on Friday evening, after the
bank's branches have closed for the weekend. Sometimes the FDIC will
even wait another week to step in. Every bank to fail this year has
been shut down on a Friday. The FDIC steps in on Fridays to ensure a
smooth transition so that customers hardly notice the handover.

In
WaMu's case, the FDIC set a Wednesday evening deadline for interested
parties to submit their offers for various parts of WaMu. Twenty-four
hours later, they were already preparing to seize the bank. Earlier
this month, Treasury Secretary Henry Paulson made it clear to WaMu that
the company should have accepted the takeover deal J.P. Morgan had
offered earlier this year, according to a person close to WaMu.

As
pressure mounted on WaMu over the past two and a half weeks,
regulators sparred over how to handle the situation, according to people
familiar with the matter. Last week WaMu met in Washington, D.C., with
the FDIC and OTS, WaMu's chief regulator. WaMu, according to a person
familiar with the situation, asked for the meeting because it had
received conflicting information from the two agencies. The tension
between the two groups was palpable, this person said. The FDIC, this
person said, was more aggressive in describing the information it wanted
from the thrift.

Federal regulators said the exodus of deposits
left WaMu "with insufficient liquidity to meet its obligations." As a
result, WaMu was in "an unsafe and unsound condition to transact
business," according to the OTS.

The OTS closed WaMu on Thursday
and appointed the FDIC as receiver. The FDIC ran the bidding process
that resulted in the decision to sell WaMu's banking operations to J.P.
Morgan....

"The housing market downturn had a significant impact
on the performance of WaMu's mortgage portfolio," said OTS director
John Reich. [which was actively traded on a proprietary
basis, hence the pertinence of the Volcker Rule
]

With
mortgage losses mounting and its stock price plunging, WaMu has been
scrambling over the past month to find a solution. Last week, it put
itself on the auction block. A number of banks -- including Citigroup
Inc., Wells Fargo and Banco
Santander
SA -- pored over WaMu's books, but the bank didn't
receive any offers. This week, WaMu's outside bankers approached a
group of private-equity funds to gauge their interest in a deal. Those
talks were viewed as a last-ditch effort.

 The
article above was date SEPTEMBER 26, 2008. I warned my blog readers
about Washington Mutual in September of 2007, and was short the stock
from that point until its demise. Reference "Yeah,
Countrywide is pretty bad, but it ain’t the only one at the subprime
party… Comparing Countrywide to its Peers
", Saturday, 08 September
2007 :

 From my experience, there is
evidence of this from Lehman Brothers, Washington Mutual and
potentially IndyMac Bank as well. I am fairly sure that there are
surprises to be had from all three of these banks as well in the
upcoming quarters, big surprises. These practices were supported
indirectly by Citibank, Lehman Brothers and Wamu through their
warehouse credit lines to subprime mortgage banks, most of which have
gone out of business or scaled down operations...

Wamu's
nonperforming loans have doubled from the June 30th quarter
of ‘06 to the most recent quarter, from .62% to 1.29%, but excludes
"Excludes nonaccrual loans held for sale". My best guess is that these
are the loans that have not been earmarked for the investment
portfolio, and are being held for sale, thus are not held under the
accrual accounting rules. If this is the case, these numbers were
delivered just before the massive upheaval in the markets where
investors totally shunned the MBS products. If my hunch is correct,
then "Excludes nonaccrual loans held for sale" category will be forced
into the investment portfolio, and this may look bad. The banks tried
to sell off the garbage, and Wamu wrote its fair share of it. Reference
their
option
arm product
which was not only an annual (and monthly)
arm product, but gave the payer the option to go negative amortization
(pay a portion of the interest and allow the rest to get tacked onto
the principal)...

Even in reclaiming the property
through foreclosure, Wamu will take a BIG loss on these. Wells Fargo
shows a large amount of Level 3 gains in their latest earnings report.
Level 3 gains are those market to myth (I mean model) profits that are
derived from modeling a price in lieu of obtaining it from the market
place. They may be force to keep these on the books for a long time
and/or take significant losses on them. More on Wells Fargo later...

I
think Wamu got stuck with a lot of this stuff... Unlike Countrywide,
Wamu appears to have adequate liquidity due to a larger and more
diversified thrift business, but that doesn't mean that they ain't
going to lose a lot of money on their less than prudent lending
practices. Their tangible equity to total capital is 6.07%, but
includes the footnote "Excludes unrealized net gain/loss on
available-for-sale securities and derivatives, goodwill and intangible
assets (except MSR) and the impact from the adoption and application of
FASB Statement No. 158, Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans, as of December 31, 2006.
Minority interests of $2.94 billion for June 30, 2007, $2.45 billion for
March 31, 2007 and December 31, 2006 and $1.96 billion for September
30, 2006 and June 30, 2006 are included in the numerator." Now this is
scary, for these are most likely the derivatives that have no credible
bid, thus cannot be priced and/or marked to market. Exactly what is the
unrealized net gain/loss and how is it derived? We're talking 20.1
billion in subprime, and almost 30 billion in multi-family loans with a
total of 206.7 billion dollars of loans in their portfolio. Wamu does
not want high defaults or the impairment of their collateral. I think
both are a forgone conclusion due to the aggressive underwriting to
obtain these loans, specifically through the Option ARM product. How
much so is the question. The Home Loans group within Wamu has taken
consistent losses for the last 4 quarters, primarily due to provisions
for losses and non-interest expenses.

Now, on to the importance of the Volcker Rule since we
have put WaMu into historical perspective. 

From Allbusiness.com

Washington Mutual
Hires John Drastal as Managing Director of Trading for WaMu Capital
Corp.

Publication: Business Wire
Date:
Monday, November 18 2002
You are viewing page 1

Business Editors

SEATTLE--(BUSINESS WIRE)--Nov. 18, 2002

WaMu Capital Corp., a fixed-income institutional
broker-dealer and subsidiary of Washington Mutual, Inc. (NYSE:WM), has
hired John Drastal as the managing director of trading.


Drastal will oversee all fixed income trading and risk
management within the firm, and will act as primary contact within the
dealer community.

"John will play a key
role as WaMu Capital Corp. continues to build out its mortgage and
securitization platform," said Tim Maimone, president, WaMu Capital
Corp. "Over the next year we expect to strategically grow our sales and
trading operations.
We also plan to open a New York sales
office to complement our current offices in Seattle and Los Angeles."
Drastal brings a wealth of Wall Street experience to the
broker-dealer. Prior to joining WaMu Capital Corp., Drastal spent five
years as managing director and principal for Donaldson, Lufkin and
Jenrette, where he was responsible for all aspects of the mortgage and
asset-backed security trading business, including position and risk
management, personnel, distribution, research, finance, operations and
new business development.

In his 14 years
of experience in fixed-income trading and management, Drastal has also
held senior positions at Goldman Sachs and Company, Lehman Brothers
Inc. and Drexel, Burnham and Lambert.
Drastal holds a master's
degree in industrial administration (MBA) from Carnegie Melon
University and earned a bachelor's degree in computer science from the
University of Delaware.

About Washington Mutual

With a history dating back to 1889, Washington Mutual is a
national financial services company that provides a diversified line
of products and services to consumers and small- to mid-sized
businesses. At September 30, 2002, Washington Mutual and its
subsidiaries had assets of $261.10 billion. Washington Mutual currently
operates more than 2,500 consumer banking
, mortgage lending,
commercial banking, consumer finance and financial services offices
throughout the nation.

It is truly unfortunate that
such misinformation and disinformation is allowed to permeate through
not only the media, but actual congressional hearings. It is truly a
shame. If I am not mistaken, WaMu was the biggest bank/thrift failure,
EVER! If anything, this should provide momentum BEHIND the Volcker Rule
in lieu of having politicians trying to out-regulate an accomplished
regulator on how to regulate banks.

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Anonymous's picture

corker and his senate companion from tn lamar are rubber stamps for the financial industry directly and the architects of this economic failure generally. his stance reflects entrenched politics of our home state most notably in the senate. no amount of calls and emails to his office will change his fence straddling press releases, his committee questioning softballs, or his unwavering support for the power broker's henchmen behind the steamroller that has flattened the the poor dumb taxpayer.

dont waste your breath the bilge scum, his allegiance is unwavering to his cause. just note that he is part of the problem needing resolution.

RSDallas's picture

I'm not convinced that the banks will be split up.  This seems to be all smoke & mirrors by Obama.  I haven't read anywhere that prop trading caused any problems during this financial mess.  The US financial world simply made a ton of really bad loan decisions.

Lawmakers (at least a majority of them) are to blame for promoting and allowing Freddie, Fannie and all lenders to grossly loosen their underwriting guidelines for a home mortgage.  PERIOD!  This is (in my opinion) where the buck stops and the White House and our lawmakers have done a GREAT job in keeping these facts from the American people. 

The financial industry is to blame for being so incredibly stupid in thinking that the house of cards couldn't collapse all at once by merely mixing some bad loans with good loans and selling them all of the world, so called spreading of risk.

The FED is to blame for not recognizing the impact the loose lending guidelines were having on real estate prices (both commercial & residential) and defaults.  They could have offered the rheteric to help deflate this bubble.

Back to the prop desks.  Do they pose a risk for depositors or tax payers?  Most definitely they could.  But this part of their business did not cause this financial melt down. 

By the way, I do support separating the trading business from the deposit business but not because of this recent financial collapse.  Nobody can say that it doesn't add another layer of risk that doesn't need to be there. 

We should however remind ourselves that the AMERICAN taxpayers and depositors will ALWAYS be subject to the risk of loss due to the fact that we operate in a fiat banking system.  I mean deposits are the source of a banks funds to lend out.  This is where the regulators need to do what they are paid to do and that is making sure these banks are not making to many loans that have a high propensity to default.

A thought on commercial loans:  My father was a bank executive for all of his professional career and I noticed over time that quality bank and loan officers were phased out with basically low paid order takers.  Those that were phased out were the ones who used to ultimately influence the outcome of a loan.  These professionals were a part of the local community and in many cases personally knew the loan applicant and what type of person they were.  A bank officer or loan officer in today's mega banks no longer posses these influences.  As a matter of fact the well trained and savvy bank officer has been replaced with a team leader.  What the hell is a team leader anyway? I have often wondered what impact this has had on the overall quality of today's commercial loans?

Does our banking industry really just need to get back to the basics of their profession?  Seems a lot simpler of a solution than what I see our law makers suggesting.

Anonymous's picture

Are senators to behave like a pack of wolves challenging legislation on the premise

that only what's failed need to be corrected as opposed to what impending catastrophe.

Are they to institute legislation only to fix what is being broken.

The shortsightedness and lack of vision is appalling that the senate should voice concerns as a lobbyst.

The merger of the investment banks with investments banks constitute unprecedented financial coup-d'etat.

Access to funds and information from FEd reserve an use it for unregulated trading. Volcker understands

that innovative financial instruemnts have not served for the benefit of the economy or GDP growth and

merely created wealth destruction.

I find it surprising that CDS was not termed as another means of proprietary trading that has proven to be a failure.

Anonymous's picture

Thanks for what, this post?

This post is totally irrelevant and reveals a pre-school level of brain development.

Did the Wamu failure have ANYTHING to do with: trading (prop or not), in house hedge funds, etc?

Ummm NO. Reggie, sometimes at least trying to use your brain before opening your (loud) mouth to advertise your "brilliance" might be a good idea.

Reggie Middleton's picture

Maybe you should read the post before you criticize. First of all, I was pointing out an error in the Senator's assertion. Second, in another comment I made very clear how prop trading and speculation among insured banks had a lot to do with failure. They created artificial liquidity for the MBS market that should not have existed because the capital was born from government subsidies in lieu of what should have been pure risk capital of entities such as hedge funds and investment banks.

Without federally insured buyers and traders, the MBS market would have been much smaller, hence doing less damage.

Notice how I can communicate without being an asshole. I suggest you try it.

Anonymous's picture

Are senators to behave like a pack of wolves challenging legislation on the premise

that only what's failed need to be corrected as opposed to what impending catastrophe.

Are they to institute legislation only to fix what is being broken.

The shortsightedness and lack of vision is appalling that the senate should voice concerns as a lobbyst.

The merger of the investment banks with investments banks constitute unprecedented financial coup-d'etat.

Access to funds and information from FEd reserve an use it for unregulated trading. Volcker understands

that innovative financial instruemnts have not served for the benefit of the economy or GDP growth and

merely created wealth destruction.

I find it surprising that CDS was not termed as another means of proprietary trading that has proven to be a failure.

Anonymous's picture

AND what does WAMU have to do with prop trading exactly ??? Retard.

Anonymous's picture

Problem is the population is too busy watching reality TV and refinancing their houses for 5% to really care about what goes on in congress. Give people the illusion of wealth by falsely inflating stock markets and subsidizing loans and they don't really care about what a smart man like Volcker has to say. The rot in our society runs deep.

Anonymous's picture

......That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.......

throw the bum out.

Anonymous's picture

ouch, i used to work for wcc

Anonymous's picture

It is really shame that a Senator would have no clue as to what is going on. And indeed it is high-time for Congress to look into the financial conflict of interest rules and how to perfect the unsustainable economic imperfections. Fire Congress, abolish the Fed, redo legal tender laws, abolish fractional reserve banking/multiplier effect, and adopt mathematical soundness in all of transactions. No more dudes stealing from Peter to pay Paul. mms

Anonymous's picture

Although yes WaMu was a commercial bank that failed, their failure had absolutely nothing to do with WaMu capital Corp. The reason WaMu failed, and the reason Countrywide would have failed was because of the incredible amount of horrible loans that they made. In fact WaMu capital Corp was closed for a year by the time the bank was ever taken over. The fact of the matter and what the senator should have said is that the Volker rule wouldn't have regulated pretty much all the places that would have failed. And the ones that it did regulate , it would have no power to stop what caused them to fail. Fannie and Freddie were way to big and had billions in bad loans on their books, their "failure" had nothing to do with prop trading. Lehman and Bear were both not commercial banks. AIG is goverened by the states and once again is not a bank.

Reggie Middleton's picture

What he should have said and what he "did" say are two different animals. In addition, there is a connection with prop trading by insured entities and failure. The reason why the MBS market got so big in the first place was the excess liquidity provided by instituions who were federally insured. Subtract the federally insured instiutions who had access to cheap govt. subsidized capital (ex. insured deposits, window access, etc.) and you would have had a materially smaller market in which to sell said MBS. If deposit holding banks weren't allowed to engage in said trading, it would have been left up to pure, non-insured speculators, ex. hedge funds and investment banks, and would have made the garbage MBS distribution much more shallow, not to mention would have reduced the market for the MBS and would have induced more banks to keep whole loans on their books which would have made them more responsible for prudent underwriting in the first place.

Hence, AIG, Lehman and Bear would have had less MBS to begin with, and potentially may not have even failed.

JR's picture

Great reporting, Reggie.  "The truth has always been dangerous to the rule of the rogue, the exploiter, the robber." --Eugene V. Debs

The Congress is out of control, worse than we’ve ever seen throughout our history.  America is at her low point.  The people are finding out what most of the world has long known.  What it’s like to have a government without representation, what it’s like to have someone ride in and take your property and there’s nothing you can do about it.

As stock ownership (and lobbyist influence) rises in Congress, experts warn of potential ethics concerns.

More than half of all lawmakers own stock. In the House, the number of lawmakers trading stock jumped from 91 in 2001 to 259 today (November 23, 2009 date of article)…

"It is time for Congress to take a fresh look at the financial conflict-of-interest rules, and how they should be enforced -- starting with a thorough overhaul of the disclosure process," said Harvard University government professor Dennis F. Thompson, author of "Ethics in Congress." "Stronger regulation of financial conflicts is necessary not so much to prevent quid pro quo deals, but to check the erosion of trust in government," he said.

http://www.washingtonpost.com/wp-dyn/content/article/2009/11/22/AR2009112202217.html

 

 

Screwball's picture

It was pretty obvious who's side this clown is on.  Throw his ass out.  Volcker has some quality one liners today. It was fun to watch.

Thanks Reggie.

Anonymous's picture

Bank lobby dressing down the best Fed chair ever via an arrogant corrupt U.S. Senator? Shameful, pathetic, nauseating.

deadhead's picture

Nicely done, Reggie.  Thank you.

Kayman's picture

Corker needs to put a Cork in it. A lapdog of GS or delusional. Or a lapdog of GS and delusional.

Either way this puppy is going to be put outside in the cold for a very long time.

boooyaaaah's picture

Corker knows who butters his bread -- not Volker

Rainman's picture

Corker needs to catch some " LIAR " lines thrown at him.

He's reading off the Bankster teleprompter. He really has no grasp of what the hell is already processed and understood by the morts in the world of uncorrupted reality.

Anonymous's picture

While Mr. Corker's stance came across as an advertisement for the banks "Since you have no opposing facts, let's move forward with my statement as fact." Yeah - Volcker is supposed to be pulling stuff out of his ass to shoot down your endorsement of the banks that is blatantly self interested.

Mr. Corker was referring ONLY to bank failures WRT this meltdown, nothing prior to 2007.

I believe someone already posted how his statement was false - wrt - Merrill Lynch going under.