It was just a matter of time WaMu was either shut by the government or sold (in this case both happened).

In the largest bank seizure of all time, rougly 310 billion in assets, the FDIC stepped in and closed WaMu down but did not need to use insurance funds as the FDIC was able to broker a deal in which J.P. Morgan purchased Washington Mutual assets for 1.9 billion dollars.  As a result, JP/Chase will write down roughly 31 billion in bad mortgages WaMu had owned.

The J.P. Morgan/Chase purchase of Washington Mutual’s retail banking business, which is incredibly strong, is a huge victory for the bank.  In the long wrong this purchase has the ability to give JPM a HUGE retail footing and grow into territories previously unavailable to the bank.

Ron Paul, who at one point was running for the Presidency, has a long history of speaking out on negative government policy before the impact of the policy is felt. Today, he has a commentary on CNN regarding the current financial bail-out:

The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.
It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.

So, what Paul is saying is do not bail-out the companies, rather put an end to the policies that have created an environment that lead to economic turmoil.

In general, I do not agree with everything Paul says.  He has been spot on with past some predictions, but he also has some questionable individuals tied to him which make me – and the general public – less likely to listen to him.

What about this time? Should we be taking his warning?

There are a number of things that are being said in the news / press / world of blogs that I need to be addressed.

The Stock Market is not the economy

Without a doubt, the stock market is wild right now.  The press gets excited when the wild swing and destruction of capital takes place, but it has happened a number of times in the past – it’s all part of capitalism.  It happened in 2001, in 1990, 1987, early 80s… and on and on and on.

Corporate scandals, poor business practices, and just plain dumb luck will lead to situations like this all the time.  Currently, the financial industry is in disarray but this does not equate to an overall bad economy.  While economic growth is not historic highs it is also not contracting.  As of now, the United States is not, officially, in a recession.

The collapse of AIG, et al., is not a giant conspiracy

I want to know if people are still taking their medication.  More and more there are stories / commentaries that the bailout of AIG is due to the company being a front for the government or that we are heading into a financial dictatorship.

The reason AIG was given what amounts to a structured bankruptcy is quite simply. Their debt, the bonds they offered, was considered to be some of the highest-grade investment vehicles on the market.  Just about every major company in the WORLD owns said bonds and if the assets suddenly became worthless, the potential for failures of companies worldwide was very real.

The $700 Billion dollar rescue is the right thing

The creation of a Resolution Trust is the right thing to do and creates a bottom for the mortgage industry – the mortgages are now set with a value established by asset managers, backed by the government, and create a tradable security for the investment market.    Furthermore, as the real estate market improves the government will be sitting on A HUGE asset bank that goes right back into the treasury.

This is all caused by poor regulation, greed and policy

Yes, policy created this current situation, but it wasn’t Bush policy – it was Clinton policy.  President Clinton pushed extensive changes allowing lenders to distribute and fill “questionable” loans, his legislation – essentially – allowed the sub-prime mortgage industry to start.

In 2002, Ron Paul called for change due to the financial risk, in 2003 President Bush recommended a regulatory overall to prevent a collapse and in 2005 John McCain warned of a financial collapse but NO one acted.

Who failed to act?  Congress.

Bankers utilized the “loose” regulation and got greedy.  They started to issue loans to individuals who could not afford their loans and, next thing you know, boom there is a crash.

This is life…

The stock market, the economy and life are full of ups and downs.  What the government is doing right now is attempting to provide stability to the financial and credit markets, and as the economy as a whole.  Is it what I want to see in a free market society, no?  Is it the right thing to do, yes.

From very early on I have held the belief that we are not in the middle of a banking collapse, rather we are in the middle of a market correction. It is also important to separate banks that are going under from the likes of Freddie Mac, Fannie Mae, Lehman and AIG. While all can be tied to the same cause, they fall into three separate categories.

Category 1

The retail banking industry, where you and I have our money, has seen 11 organizations close to date. Closures were directly connected to bad debt and an inability to provide liquidity for all deposits within the bank. It important to note, deposits in such banks are federally insured up to $100,000 per account.

Category 2

The recent bankruptcy of Lehman Brothers, a money center bank, falls into the commercial category. They are not a retail bank, nor did they do retail business, which means the government did not need to utilize the Federal bank insurance fund to cover monies. Again, the failure was tied to illiquidity due to bad debt.

Category 3

AIG is neither a retail bank nor a money center bank (brokerage) but an insurance provider to a number of industries, including banking. The liquidity crunch currently facing this organization is due to the insurance underwritten to cover banks debt (both retail and brokerages). No FDIC coverage, no “man on the street” unable to obtain his or her money because of the situation.

Retails banks will continue to fail due to bad debt, and would even fail in good markets due to mismanagement, I think it would be hard to say we have a banking collapse unless people were having difficulty obtaining their money. At that point we would truly be facing a banking collapse, which is why I am concerned to see that the Federal bank insurance fund dwindling and regulators consider options for replenishing it.

From the article:

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

Basically, if a large retail bank goes under the FDIC is out of money and needs to find additional funds, most likely in the form of a loan from the treasury. What happens, though, if several large retail banks collapse at the same time?

The FDIC predicts difficulty with one large retail institution; several closings could cause a shortage of funds available to the public. Take it on step further – what if the FDIC cannot obtain the money from the government in order to cover the deposits?

This is what a true banking collapse would be.

What the financial markets face today are two ugly monsters, walking hand and hand, causing devastation wherever they seem to go.

First off, the economy is stuck in the middle of a Sub-Prime mortgage crisis. Essentially, banks became greedy and started handing out mortgages and loans to just about anyone who had a pulse, couple this with falling real estates values and there is a disaster waiting to happen.

A large number of the recipients of said loans often had poor credit and little to no money down on the property they purchased. Suddenly, home owners can no longer pay on their mortgage (loss of a job, mortgage rates changed) and the bank is left with property deflated in value and no one to pay on the loan. This means financial institutions are now holding “bad debt” – receivables that can no longer be collected on – which needs to be covered on the company’s balance sheet. When the bank can no longer cover the debt situations like Countrywide, Lehman Brothers or Bear Stearns take place, they go out of business and the remaining assets, or anything of value, are purchased by competitors for pennies on the dollar.

The second crisis facing Wall Street – no, the economy in general – is now a credit crunch.

Due to the risk seen in the mortgage industry, and the bodies on Wall Street, banks and institutions are unwilling to provide, or make it incredible difficult to obtain credit for, individuals or companies.

You want a new car? Maybe you cannot get a loan because your credit is under 700. What about that oil producer? BigOil Co. wants to expand operations but cannot obtain a loan because the cost is too great, there by reducing a competitive advantage. Worse yet, companies that need bridge funding – funding for the short term to fund operations – may be unable to get the cash they need and as a result go out of business.

AIG, one of the largest bond insurers in the World, is being hit by both the sub-prime crisis and the credit crunch.

One of the many products AIG offered was insurance on financial products and what is hurting the company at this point is their insurance of mortgages. When a financial institution had a loan that is considered to be “bad” they file a claim (AIG) in order to recoup their money. While AIG could be able to insure the mortgage portfolio of one institution, say Country Wide for example, it did not have enough money to fund the portfolios of Country Wide, Lehman and Bear Sterns combined. So, what does the company do? Go to the credit market…but that well may be dry due to the credit crunch as described above, leaving the company trying to find a buyer for it’s assets, find funding at a steep price, or going bankrupt.

Note: Constellation Energy fell almost 40% as investors fear banks may pull lines of credit – this is how the credit crunch can impact ALL aspects of the world economy.

The sub-prime crisis triggered the credit crunch. As a result every individual, world wide, is at risk of being impacted in some way – be it large or small. The lack of credit or liquidity has the ability to send economies around the world into recession. If businesses are not spending money, people are not spending money, and economies shrink until the deflation has worked out of the system.

While I understand the government’s reason for stepping in to socialize Fannie Mae and Feddie Mac, I am sure I agree with the decision to do so. The only thing I can assume is the impact on the U.S., and potentially global, economy was so great no other option existed. So, in this political season the question that seems to be asked quite often is “What policy could be put in place to stop this?” Short answer: none.

As much as people do not want to hear it, this is what happens in a free market. Ups and downs occur. The government should not be rescuing companies because of their greed or poor judgment, nor should they be bailing out the “man on the street” that purchased too much home.

The one place government does need to look; however, is their enforcement of financially significant data. A number of the financial institutions with bad debt were unable to tell investors or regulators just how much risk was on their books (i.e. – we don’t know how many of our loans are bad). This lack of visibility in financial information led to the sudden collapse of firms like Bear Sterns and Lehman

Funny thing… I thought SOx was going to fix all of that.

Hang on, the ride is going to be bumpy for some time.

Others Covering:

The Anchoress: Wall Street Woes, Media Meltdown & More
Hot Air: Who’s policies led to the credit crisis
Right Voices: Dodd says he was on top of the financial crisis
Flopping Aces: Democrats rewriting history once more
The Dude’s Blog: Disingenuous Dems Lying About Credit Crisis

With the Lehman bankruptcy filing it was a foregone conclusion that the stock market was going to be hammered today. The DOW opened down almost 300 points – Energy, Basic Materials, Conglomerates and Financial were hit the hardest.

This is a sell due to Lehman along with falling oil and weakness in the dollar, but what a sell off it is. Just focusing in the Investment Services sector for a second, look at where stocks sit as of right now (11AM ET)

Lehman Brothers (LEH) – 0.20 – down 94.4%
AIG (AIG) – down 42%
Bank of America (BAC) - down 15.23%
UBS AG (UBS) – 17.83 – down 13.44%
Morgan Stanley (MS) – 34.16 – down 8.25%

AIG is in the downward spiral Lehman was facing, all this because of exposure to bad debt with real estate. Based on reports in the media AIG is searching hard for funding and may not be able to avoid a liquidity crisis.

One has to ask where will the pain end? Ironically, the answer seems to be when the housing market stabilizes. It’s funny the investment instrument that helped create the current situation may be the thing that can put a stop to this mess. The only issue is that it may be a long time off…

Talk about a wild day on Wall St. – Lehman Bro. is on the verge of bankruptcy and Bank of America has agreed to buy Merrill Lynch at $29 / per share, which is a $12 premium over Friday’s close.

Why the buy-out of Merrill and not Lehman?  While Merrill is also facing a number of debt issues, much like Lehman, their assets are considered to be superior to Lehman.  Merrill Lynch has $1.6 trillion in asset management.  Also, this purchase will allow Bank of America the ability to take Merrill’s 49.8% stake in BlackRock which has more than $1 trillion in assets under management.

This means Monday will see the transformation of Wall Street – Lehman will, most likely, go under and Bank of America will purchase the 94 year old institution known as Merrill Lynch.

Not a bad purchase on B o A’s part for $44 Billion.

Wall St. woke up and saw the writing on the wall for Lehman Brothers (LEH) this past week.  Thinking bankruptcy was a distinct possibility; investors sold off the stock letting the price fall roughly 77.4% in the last five days alone.  So, where does this leave us?

Starting Friday evening, members of the Federal Reserve and Senior Management of Large US banking concerns were meeting to discuss a purchase of Lehman.  The Government made it clear no funds would be provided to save the bank, nor would they subsidize the purchase for any interested party.  Does that mean anything at this point?  Just a few weeks ago they said Freddie Mac and Fannie Mae were not going to be supported with Government funds either.

As the weekend continued on Barclays bank, out of the U.K., emerged as a potential buyer of Lehman but decided against the purchase when the U.S. government would not offer to limit the potential losses. This means, as of right now, no known buyer is stepping up to make the purcahse.

Right now it looks as if Bankruptcy is the only way out, but what other possible – all be it slim fates – may await Lehman?

• Another buyer is found who is willing to pick up all liabilities
• Another buyer is found but the Federal Reserve will help support the purchase by funding a portion of the sale or accepting some of Lehman’s liabilities
• No buyer is found; bankruptcy takes place, causing possible panic on Wall St.

The big reason the Fed wants to resolve this issue over the weekend really means a Lehman collapse has the potential to throw the market into a panic and bring other banks down in the process, but the Street seems to think otherwise.  With the pending collapse of Lehman is that the money markets do not seem to be concerned with what is occurring.

Is it a bankruptcy?  Is it a buy-out?  Is it a buy-out with government support?  Let’s see what Monday brings…

Others covering:

Chartsandnumbers – Lehman Brothers Fate
Lehman Brothers Weekend Opera @ Ruleboy
nahnopenotquite.com – Lehman to be Liquidated?

Another bank hit the skids today – Silver State Bank in Nevada.

Silver State had 12 branches in Nevada and Arizona as well as loan offices in Nevada, Utah, Colorado, Washington, Oregon, California and Florida.  As of June 30th, Silver State had $2 billion in assets and $1.7 billion in deposits.  All insured deposits will be assumed by Nevada State Bank and brances will be open on Monday.

Ok, a small bank isn’t too bad but there is news that Fannie Mac and Freddie Mac will be taken over by the government this weekend.  In terms of big business events, this one is HUGE.  According to the article the cost to the tax payer is yet known but you can be 99.999% sure that any share holder equity will be wiped out.  (Translation – the stock will be worthless)

While I would never have been a long term share holder of either company, I think it is highly irresponsible for for Treasury Secretary Henry Paulson to come out and claim there would be no Bail Out of either company. Also, in July, each company said they had plenty of capital to withstand the mortgage meltdown.  Either conditions drastically changed or the companies were lying to investors, as well as the public.

Expect banks to continue to fail over the next several months but, remember, we are not in a banking collapse, we are experiencing a correction.

Another hedge fund hit this skids this past weekend. The famed Ospraie hedge fund is shutting down its main investment vehicle after a 27% drop in fund value in the month of August and a total of roughly 38% for the entire year. While hedge funds are the unregulated playthings of the rich, often open to individuals with large personal fortunes, the investments are often very risky due to a lack of diversification.

In 2008 a number of funds closed their doors due to investments in mortgages, bad mortgages to be more specific, but the Ospraie shuttering opens a the gates for a new type of collapse – commodities. The feared commodity bubble may have popped and, as a result, investment firms with energy, mining and natural resources are starting to absorb heavy losses.

Plain and simple, there bets didn’t pay off and now they need to pay the bookie. As with banks closing, welcome to capitalism!

9/4/08 Update – MSN Money has a story on the situation as well

9/5/08 Update – Ospraie may have bet to much on Natural Gas