Let’s Stop Promoting Washington Mutual

September 15, 2008 by  
Filed under Debt and Credit, Loans and Borrowing

Washington Mutual (a/k/a WaMu) is actively promoting its CD and deposit account products, including through some of my fellow personal finance bloggers.  I think this needs to stop.

WaMu is on the brink of failure.  Yes CD’s and deposit accounts are insured by FDIC but that is not the entire story.  There is some hard truth about WaMu’s behavior in the mortgage business that needs to be considered.

I suggest that you read this Bloomberg story about WaMu’s deep involvement and aggressive defense of option ARM loans.  You may recall that option ARM loans allowed borrowers to partially suspend their payments, causing negative amortization of their mortgage balance.  Also according to Bloomberg, 83% of option ARM loans between 2004 and 2007 were underwritten without adequate documentation of the borrower’s income.  Shameful – for both borrowers and lenders.

The interest rates on many option ARM loans issued by Washington Mutual will begin resetting later this year and early in 2009.  Many of these borrowers will not be able to keep up their payments and will default, causing even more destruction of WaMu’s balance sheet.

WaMu Caused the Pain Now it Must Feel the Pain

If you consider this quoted language from the Bloomberg article and WaMu’s own executives, Washington Mutual is getting what it deserves:

Killinger [WaMu CEO] said in a July 22, 2004, conference call with analysts that option ARMs were a product that would boost Washington Mutual’s profit margin.

“We will emphasize origination of higher margin product such as option ARMs and we will emphasize originations through our retail and wholesale channels,” Killinger said.

Six months later, Chief Financial Officer Thomas Casey told analysts that the lender would “push that option ARM as hard as we can.”

“We believe that the option ARM is a differentiating product for us, and we’re continuing to see nice gains on that compared to some of the other products that are out on the market right now so that will be a continued focus for us,” Casey said Jan. 20, 2005.

This kind of talk and aggressive promotion was irresponsible.  In 2007, I owned stock in WaMu (for the dividend yield) but I sold it earlier this year when I learned what was happening.  I now encourage my fellow PF bloggers to back off WaMu as a destination for depositors’ money, which will only put more strain on the FDIC when things come crashing down.

There is plenty of pain to go around and it should be felt by all involved in the credit debacle, not just borrowers and taxpayers. 


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Comments

5 Responses to “Let’s Stop Promoting Washington Mutual”
  1. Laura says:

    The news has definitely jittered some people today. I couldn’t get away from hearing some speculations on who is next. After reading several articles on WaMu, I’m little leery. Thanks for your report!

  2. Aorora111 says:

    My question is this: what does this mean to the average person? Many financial stories don’t quite break it down to that level. I don’t follow stocks and financial news as well as I should, though I’m trying to remedy that. However, as a credit card holder, how would that impact me?

  3. Laura – AIG and WaMu are both in the target zone right now.

    Aorora111 – In my opinion the average person who is looking for a place to deposit funds, WaMu should be off the list – they don’t deserve your business. As a credit card holder, it should not affect you as that business will survive and probably be quickly sold in the event of a bank failure. Thanks for visiting.

  4. Strabo says:

    @Aorora111:
    Directly most likely nothing – you will have to pay your CC bills like always.
    But generally if WaMu goes down:
    The FDIC only has about 50 billion dollar left – WaMu has assets over 300 billion dollar. Granted, not all of this assets are FDIC-insured, but if the FDIC needs more money than it haa it has to turn to the Fed. The Fed only has one option to raise this money: printing more dollars, increasing inflation.

  5. I’m glad I learned about all of this a few days ago. I was seriously considering opening a savings account with WaMu. I think I’ll go with FNBO or ING instead.

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