Bank Consolidation Part of WaMu's Legacy

This week, TheStreet and RealMoney will be exploring the aftermath of Lehman Brothers' bankruptcy filing and the ensuing market chaos it brought to a head almost a year ago. Read all of our One Year Later coverage.

SEATTLE (TheStreet) -- Washington Mutual's failure nearly a year ago, while at the time shocking in its size and scope, now stands as the most prominent example of an ongoing and much-needed consolidation of the U.S. retail banking industry.

WaMu was seized by regulators on Sept. 25, 2008, following a bank run by waves of nervous customers a little more than a week after Lehman Brothers filed for bankruptcy and the federal government bailed out giant insurer American International Group (AIG). It was the largest bank failure in U.S. history.

The thrift built its mammoth business by taking excessive risk in originating shoddy home loans with poor underwriting standards -- a strategy that was exposed as the housing bubble burst. Its reliance on wholesale funding for loans instead of deposits put the company in an impossible position when the credit markets dried up.

WaMu wasn't the first bank to go under in the credit crisis, and it certainly wasn't the last. One hundred and four banks have failed since it did, and plenty more weak banks are sure to go under before it's all over.

But this rash of failures also presents an opportunity to stronger banks to grab more deposits as a source of funding and to expand their branch footprint -- just as JPMorgan Chase (JPM) did in snapping up the carcass of WaMu. At the same time smaller banks will have trouble competing with the big four banks in lending, which will be "driven by economies of scale," says Tom Brown, CEO of hedge fund Second Curve Capital and co-owner of Bankstocks.com.

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"I think you're going to see an even more massive consolidation in banking from 2010 to 2015," Brown says. "Every bank outside of the top 10 has a growth problem in terms of how are they growing their loan portfolio. I don't think they will."