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Bair's Puzzling WaMu Comments

FDIC Chairwoman Sheila Bair was on Capitol Hill last week extolling her agency's handing of Washington Mutual, and senior writer Dan Freed found the comments to be worth a closer look.



) --

Federal Deposit Insurance Corp.

Chairwoman Sheila Bair made special mention of

Washington Mutual

(WAMUQ.PK) in her opening statement before the Financial Crisis Inquiry Commission last week, and her comments bear close scrutiny for a couple of reasons.

First, the mention of any company is interesting because regulators in general don't like to mention specific companies. In fact, not mentioning companies when speaking publicly seems to be a special trick of not only regulators, but investors, investment bankers, attorneys -- you name it. They must all take the same PR class.

Lesson number one: Speak in generalities. Don't mention companies, dollar amounts -- certainly not people. If no one knows what you're talking about, it's harder to get into trouble.

Indeed, in a 20-page statement, Bair mentions only two other companies --

Fannie Mae



Freddie Mac



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A second reason that Bair's mention of Washington Mutual is interesting is that the FDIC is a co-defendant with

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report

in a lawsuit filed by WaMu creditors and shareholders, who accuse them of foul play in the seizure and sale of the giant Seattle thrift.

Bair does not mention the lawsuit in her statement before the commission. Instead, she singles out the resolution of Washington Mutual as an exemplary case of regulatory efficiency and good sense.

But what is especially puzzling is the context of the Washington Mutual reference. Bair first talks about what has become a familiar, and overstated point in commentary about the crisis: regulators did not have the tools to deal with large financial institutions that did not accept deposits from you and me.

According to this theory, addressing crises at


(C) - Get Citigroup Inc. Report



was no problem for regulators, while in cases like

Lehman Brothers



(AIG) - Get American International Group, Inc. Report

, as Bair puts it (without, of course, mentioning any of these companies by name) "the government was forced to rely on ad hoc measures involving government support to stabilize the situation."

The problem with this logic is that to most of us, the government's handling of crises at deposit-taking institutions like Citigroup and Wachovia looked just as ad hoc as their handling of non-deposit-taking institutions like Lehman and AIG. (Never mind that Lehman and AIG actually DID take deposits.)

But even granting Bair her point--that lightly regulated "shadow banks" like AIG and Lehman were a major cause of the crisis -- there is a problem with her use of Washington Mutual as an example of how the system works. Here is how she puts it:

"By 2007, banking regulators had come to understand that they did not have the proper tools to wind down a large, complex non-depository institution without causing disruptions to the broader financial markets. As a result, the government was forced to rely on ad hoc measures involving government support to stabilize the situation. An exception was the Fall 2008 resolution of the $300 billion savings bank Washington Mutual."

The problem here is that Washington Mutual is NOT a large, complex non-depository institution. Therefore, even assuming its resolution was a great success, it is not an exception to her argument that large, complex non-depository institutions are hard to wind down. It would be an example of how large complex institutions that DO take deposits are relatively EASY to wind down.

However, if Bair wants to provide an example of the ease of winding down large complex deposit-taking institutions, why not choose Wachovia, which was larger than Washington Mutual?

Possibly because Wachovia was technically not wound down: it was sold. Or possibly because the resolution of Wachovia was even more controversial than that of Washington Mutual. Bair first sold it to Citigroup, and then, when Wells Fargo came along with a higher bid, she changed her mind.

My point is not to chastise Bair -- or any other regulator -- for how Washington Mutual was wound down. I don't have enough information to do that. However, Bair should not be allowed to claim, as she does, that the handling of Washington Mutual was an unqualified success without challenge. That is especially true if, as she says, "the WAMU resolution process mirrors the way in which a large interconnected financial institution would be treated under proposals currently before Congress."

As I have previously written, serious questions remain about how Washington Mutual was wound down. Before Bair puts it in her trophy case and we use it as a model for legislative reform of the financial system, it would be nice to learn more about what happened.


Written by Dan Freed in New York