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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 23, 2009 at 9:55 AM

WaMu collapse won’t quite go away as Washington tries to engineer another bailout

Top of the News: The other Washington has not only moved on from the collapse of Washington Mutual; the biggest banking failure in history barely made it break stride. Thus there’s barely a mention about the lawsuit filed by the rump holding company of the thrift against the FDIC. All are focused on the latest scheme to rescue the “toxic” assets of the big banks, detailed by Treasury Secretary Tim Geithner. More about this in a moment.

The Washington Mutual lawsuit is arcane and will give no material relief to thousands of average shareholders who stuck with the stock out of regional loyalty, or because they couldn’t believe such a large financial institution could simply go *poof*. Nor will it restore well-paying jobs and a major headquarters in the heart of Seattle. I do wish the discovery portion of the case — if the feds let it get so far — would answer a few questions. One is why the regulators allowed WaMu to dig such a deep hole when a crisis might have been averted. I also continue to wonder about the role naked short selling might have played in essentially creating a run on the bank.

We’ll never know what might have been, say, if WaMu would have been politically connected enough to get Washington to bail out its “toxic assets” while saving the retail banking operation that would have remained a Seattle economic pillar. WaMu’s troubles will likely turn out to be small compared to the balance sheet of Bank of America, among others. Instead, WaMu was pretty much given away to the very connected JPMorgan Chase, which became even more “too big to fail.” You’ll be glad to know that JPMorgan is spending millions on new corporate jets and a fancy new hangar. JPMorgan has taken $25 billion in taxpayer bailout money so far.

The Back Story: The Geithner plan is sparking vigorous debate. Nobel laureate economist and New York Times columnist Paul Krugman despairs that the “zombie” philosophy of Hank Paulson has prevailed. “…the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.” Berkeley economist Brad DeLong disagrees.

I go back to a basic marker about this financial shock of the Great Disruption. The new plan will only work to the degree that it does not try to revive the unsustainable. There’s not going to be another housing bubble to return foreclosed houses to the prices the banks claim on their books. Much less is there going to be another financial bubble to make all those worthless sliced-and-diced derivatives worth the fantasy book value in the bankers’ fevered dreams. A final concern is that the government still is committed to the “bigger is better” model, with a few giant banks and mutants like AIG. Those institutions have a gun to the taxpayers’ heads, and, apparently, they own the hearts and minds of Obama’s economic team.

Today’s Econ Haiku:

Wall Street loves the plan

A big taxpayer hedge fund

On the hook: Main Street

Comments | More in Banking

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