While we are all properly focused on the progress of Hurricane Ike towards Houston there is another potential disaster this weekend and it could have a much greater impact on us that Ike will.
Two of the biggest financial institutions in the country, Lehman Brothers and Washington Mutual may be facing the last roundup this weekend. Both companies are in deep financial trouble and may well need either a bailout or a buyout to avoid a total collapse, something that would be a disaster.
Now before I review some of the details of each company I’d like to point out that the problems facing these two companies are the result of long term financial decisions both with the boards of each business as well as with decisions made by our government.
I know it is going to be politically tempting for each side to point fingers at the other, for Democrats to blame Republicans for deregulation in exchange for campaign contributions or for Republicans to blame Democrats for pushing the banks to take on risky home loans in the interest of ‘fairness’.
The truth is that both of these claims have some validity, deregulation did allow some of these companies to get away with things they shouldn’t have and the desire to extend home ownership to everyone did cause the banks to make loans to people that probably shouldn’t have gotten them.
However both Democrats and Republicans supprted deregulation and took money from big contributors in exchange.
Both Republicans and Democrats worked to score political points off of extending the number of people who could get loans.
And in fairness, I think in both cases there were some good intentions at play. I think people on both sides of the fence thought that some level of deregulation was a good idea and I think people on both sides were sincere in wanting to help people get into home ownership.
I am also sure that there are those among our readers who will want to try to blame this all on one side or another and that of course is part of the political game (though I would hope some would take a more balanced viewpoint).
However at this point playing the blame game is sort of like the wife who continues to argue with her husband over who is to blame for his overeating and lack of exercise. They need to stop the arguing and focus on the fact he has heart problems and start dealing with solutions.
By the same token we need to focus on possible solutions.
Looking first at Lehman Brothers it does not seem like they will be getting any sort of a federal bailout so their hopes will focus on a buyout/merger. They have been a major dealer on Wall Street since before the Civil War but at this point they are now down to $ 3.80 a share which is a major collapse from a high of nearly $ 70 in November 2007.
The major problem with a buyout is that they have more than $ 30 billion in commercial real estate assets that are worth far less than what they were purchased for and look to be dropping in value over the next few years. This is not exactly a good thing for a potential buyer
Regardless of what happens it does not seem like good news for the employees. Even with a buyout it is likely the new owner would shut down most operations and fire most of the employees. As to the rest of us, some would argue it could start a domino effect that would shatter the already weak economy while other suggest that it could be something of a good out of bad situation where people would see it is possible for the world at large to survive.
Either way it is not going to be good news to our already weakened economy.
The situation at Washington Mutual is one that could more directly impact people across the country. A collapse of Lehman Brothers would be bad for the employees as well as those who have LB stock. But in that vein it would be more of a long term impact in terms of 401K/403B/IRA accounts. Washington Mutual on the other hand would be far more personal for those of us who do business with them every day.
Indeed this morning I was commenting on the situation to a friend who turned pale as they had just opened new accounts with WM and were concerned about what would happen. Obviously anyone who has accounts less than $ 100,000 in value would be ok in the long term but checks from the government could take many many months to come.
But the real impact would be in terms of the cost to the taxpayer. When Indy Mac bank failed it had deposits of around $ 20 billion and assets of around $ 32 billion (Probably inflated numbers). But at worst it would cost the taxpayer that $ 20 billion in deposits. The worst collapse ever was $ 34 billion in 1984.
Washington Mutual on the other hand has nearly TWO HUNDRED BILLION dollars in deposits and over three hundred billion in assets. On the surface this seems strong but their stock has gone down to $ 2 a share from a 52 week high of $ 40 per share or a drop of over 90% in less than a year. Even worse, the stock has dropped by 60% in the last three days.
I would expect that in the case of Washington Mutual that the fact they have $ 100 billion more in assets than deposits should help to encourage investors but this weekend is going to be a very shaky time for them. If they have too many investments in energy stocks that could really be a problem
Now having spent the last few paragraphs spelling out doom and gloom I would like to point out that in all likelyhood WaMu will survive and that even if they don’t we will be able to work through things. The same holds true for Lehman Brothers.
But if you are keeping one eye on Ike this weekend, I’d keep half of the other one on the financial news.
Especially if you have money at WaMu.
Cross posted to The Square Deal