Washington Mutual... FAIL.

This just in... Washington Mutual has been seized by federal regulators and a deal has been struck with J.P. Morgan Chase to sell them the bulk of WaMu's existing operations. Can we say... FAIL?

Before we jump into the Q & A it is important to note that Washington Mutual is/was a thrift bank and the largest thrift bank at that. This is much like a commercial bank, except that it deals with consumers and not corporations. As a result of this, they are much more intrenched in the mortgage market. Also, like commercial banks, thrifts are still dependent on customer deposits that allow them to lend out money. Okay, now that we have all that out of the way...

Q: Why did Washington Mutual fail?

A: Too much of WaMu's operations was caught up in the mortgage mess. As things began to unravel over the course of the last few months people who had money deposited at WaMu became nervous and decided to move their money elsewhere. What was once considered a stable base of deposits, saw a dramatic decrease, ending with the departure of over $16 billion worth of deposits in the last 10 days.

Q: How does losing deposits cause a bank to fail?

A: Resulting from the departure of so much cash, WaMu was unable to meet short-term cash obligations. To explain this better lets use an example:

Note: If you have been paying attention, you know that commercial banks and thrifts rely on deposits that allow them to make loans.

Imagine that The Bank of "Your Name Here" has $100 dollars in deposits. Due to regulations, this means that your bank/thrift can lend out $1000 dollars, which would give you a debt/equity ratio of 10. This is the basis on why commercial banks are still standing, and investment banks are not.

Now, imagine that you lose half of your deposits overnight. You still have $1000 dollars loaned out, which means that all of a sudden your debt/equity ratio has jumped to 20. Right now you should be thinking to yourself "Crap. The Bank of "Your Name Here" is in deep s***. We don't have enough money to meet our short-term debt obligations. We failed."

(If you are still confused on why WaMu failed, then you just died... that is, if this was a choose your own adventure book. But no worries, just go back and read my blog about Wall Street and then continue on your merry way.)

Q: Okay. I get it. Washington Mutual failed. Federal regulators stepped in. What now?

A: Thankfully, federal regulators were also able to line up a buyer for WaMu. J.P. Morgan Chase will now purchase the deposits and branches of WaMu for the price of $1.9 billion.

Q: How will that effect people who use or have money at Washington Mutual?

A: With J.P. Morgan Chase stepping in, WaMu's operations will continue and the branches will still be open for normal operations. While all deposits are backed by the FDIC (up to $100,000), it is pretty safe to say that the FDIC won't have to step in and even people with over $100,000 don't have to worry about losing their money.

Q: What about people who own Washington Mutual stock?

A: Over the last year, the price of WaMu stock has gone from over $30 per share, to just over $1 per share. It is expected that the failure of WaMu will result in shareholders being completely wiped out... meaning they will be left holding stock certificates with a value of zero.

Q: Wow...

A: Yes... "Wow" is one of the many acceptable one word responses to a failure of this size. My condolences to anyone who owns large positions in Washington Mutual.

Q: What's next? Will commercial banks start to fail now?

A: Commercial banks are not nearly as wrapped up in the mortgage crisis as investment banks and thrift banks are. That being said, if you had asked me a year ago if the investment banks would fail, I, as well as many people, would have laughed.

Q: That really isn't the answer I was looking for...

A: Sorry. That's the best I can give you. If I knew what would happen next I probably wouldn't be spending my Thursday evening writing blog posts for my 1, maybe 2 readers. So yeah, I don't really have an answer for you on what will happen next.

Keep in mind that this JUST happened tonight. I'm sure that more details will be available tomorrow when the markets open, at which point I will try to answer any additional questions that I have for myself.

-dunkie