Wash Mu Bondholders Were Not Paid– Consequences Could Be Devastating… Warnings of Monday Crash

On Friday, the US government stepped in and sold Washington Mutual after customers withdrew $16.7 billion from accounts since Sept. 16th leaving the Seattle-based bank “unsound.”

It was later announced that Washington Mutual Inc. bondholders were likely to lose most of their money. This was a HUGE mistake by the government and must be corrected quickly or it could have major consequences.

This report was sent to me from a an international auditor in the insurance industry and close friend who understands the seriousness of the situation.
He describes the situation in layman’s terms.
It ain’t pretty:

The financial crisis is real. Most people don’t realize it yet, but banks, investment managers and corporate treasurers around the world all know what is going on. It started with the Freddie – Fannie collapse. They wrote loans to individuals who they shouldn’t have. Government policies encouraged loans to minorities and the underwriting function of banks was no longer approving loans upon an individual’s creditworthiness but their race was now a factor in the loan decision. In 1997 President Clinton’s HUD secretary, Andrew Cuomo, claimed Fannie Mae had exhibited “racial discrimination” and proposed that 50 percent of the GSEs’ (Fannie and Freddie) loan portfolio be made up of loans to low- and moderate-income borrowers by 2001. When individuals are given loans based on race and not their ability to pay, it is inevitable that bad loans would be written and foreclosures would come. That’s what happened and in a big way.

This caused ripple effects throughout the financial services industry. Firms who consolidated loan packages or guaranteed their creditworthiness were caught in the middle. Bear Sterns, Lehman Brothers and others went under. The largest insurance company in the US by some measurements was one of the casualties (AIG). With insurance companies around the globe, AIG is hoping to have some business left when all is over. The government stepped in to rescue this giant by providing capital for the firm while it liquidates portions of its business to pay off the investment derivatives which caused it trouble and then pay off the government loan. The investments became bad when the mortgages went south.

The ripple affect continues. Putnam funds, the largest money market fund in the US and rated AAA, had to close its doors since money managers began to realize that Putnam’s assets were not guaranteed by the Federal Government (unlike cash in banks and savings and loans) and began to ask for their money. Putnam had to sell securities in order to meet the demand. Although they have begun to pay their account holders, their reputation and money market accounts in general have been severely damaged.

Corporations and institutions are scared of losing their money or having it locked up so there is a rush for money. This is global as long lines were reported outside AIG offices in various Asian offices. The Taiwan government came in to help AIG in Taiwan. There are other cases like this worldwide. Rumors are that some banks in Europe may be at risk.

The largest bank to ever be taken over by the government was next. And this is the scary part. Washington Mutual was taken over by the government on Thursday. They were not able to handle the surge for cash requests and became insolvent. The government however has made a big – HUGE – mistake.

In taking over Wash Mu, the government told Wash Mu bondholders that they would not be paid. This precedent when recognized by the investors around the world will cause massive pandemonium if the government doesn’t do something quick. You see the bondholders are people and institutions who buy bonds for stable and guaranteed returns with a payoff based on the bond type. Banks and many corporations raise capital or get money by issuing bonds. If bondholders realize that their bonds with banks will not be paid off if the bank goes under, then the bond will become very risky especially during these times, if not worthless. This will cause banks the inability to raise capital to pay off the depositors they have on the books. Depositors will become scared and more ‘runs on the bank’ will occur in all financial service industries.

The President has made a proposal for the government to step in. They must do so quickly. There is no time to waste. Fear is a great motive and causes people to do crazy things. Already treasurers of companies are divesting their assets from risky investments and moving it to more safe places. This is causing illiquidity in the market and will continue if not addressed. Congress cannot continue to filibuster and lollygag. The world economy is at stake. The root problems of a government policy encouraging bad loans, corporate and government greed (some Fannie Mae executives made off with millions), and a Congress that wishes to put pork on this bill to save our economy must be addressed and now.

More… There are already reports that the stock market could suffer a devastating crash with shares losing a third of their value this week if a concensus is not reached in Congress this weekend.

With tensions high and Speaker Pelosi calling GOP members unpatriotic for missing meetings they were not invited to, it may be impossible for this to happen.
Let’s pray for a miracle.

Here’s a reminder of how this all happened:

Thank you, Democrats.
Not even warning after warning for years could get Democrats to take this crisis seriously.
Nancy Pelosi even had the gall to say this week that she was never warned! Hah!
And, they’re still not serious.

More… Doug Ross has an amazing history of this current financial mess.

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