Thursday, May 28, 2009

Has a major cause of the financial crisis been overlooked?

Who will regulate the regulators? Or hold them accountable for their actions?

John Hempton has been describing the government's takeover of Washington Mutual, and its transfer to JP Morgan Chase at a "give away" price, as one of the major causes of the financial crisis -- comparable to the Lehman collapse -- ever since it occurred:

Washington Mutual – by far the biggest bank confiscation in US history – happened during the AIG/Lehman week. It was confiscated despite being liquid and adequately capitalised at the time ...

Washington Mutual was given to JP Morgan who did not need to honour all of WaMu’s debts. Debt holders – who would normally have expected to recover most or all of their investment were wiped out.

After this – and until very recently – no major US bank could raise any debt without a government guarantee. After all – if the government could wipe you out why would you ever invest in low risk margin debt?

The confiscation of Washington Mutual thus forced the entire system onto the government guarantee tit. The cost to taxpayers is thus potentially enormous....

I said at the time that Sheila Bair [the head of the FDIC] was acting improperly ... and I said later that JPM was lying....
And now others are beginning to come to the opinion that Hempton was right.

whilst the time for Sheila Bair’s resignation as a matter of national priority is past, the time for her resignation for proven incompetence has just begun.