The New York Times has a long and detailed article about the lending practices of Washington Mutual and it’s very scary.

What do you do?  Mariachi Singer?  Well, we can’t verify your 6 figure income… let’s take your picture, that should work! 

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

 

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

Ok, fine – let’s say a photo was proof enough for a mortgage.  The companies cannot deny predatory lending practices if management was aware of actives like this took place:

Top producers became heroes. Craig Clark, called the “king of the option ARM” by colleagues, closed loans totaling about $1 billion in 2005, according to four of his former coworkers, a tally he amassed in part by challenging anyone who doubted him.

 

“He was a bulldozer when it came to getting his stuff done,” said Lisa Alvarez, who worked in the Irvine office from 2003 to 2006.

 

Christine Crocker, who managed WaMu’s wholesale underwriting division in Irvine, recalled one mortgage to an elderly couple from a broker on Mr. Clark’s team.

 

With a fixed income of about $3,200 a month, the couple needed a fixed-rate loan. But their broker earned a commission of three percentage points by arranging an option ARM for them, and did so by listing their income as $7,000 a month. Soon, their payment jumped from roughly $1,000 a month to about $3,000, causing them to fall behind.

Really, I want to know why our money is going to these organizations unchecked. 

I believe the bailout was required to prevent a total credit freeze IF it was implemented as planed. Unfortunately, it changed and no one – NO ONE – is providing any oversight of how the money is being spent.  Companies will continue to act in unethical ways if they know the government will simply given them money when they need it.

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.

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.