Washington Mutual is Next

The U.S. banking industry is in the exact situation that the Fed attempted to avoid in August. By slashing the Fed Funds rate by over 4 percent the Fed attempted to pump much needed liquidity into the financial system. Unfortunately their attempts are not enough to save banks that have overleveraged balance sheets with sour sub-prime loans. Banks like Washington Mutual over exposed themselves to the sub-prime crises, and soon a bank run will occur. When the CEO of Bear Sterns argued that Bear had enough liquidity, the market did not believe him because they know he was saying what he had to say. Washington Mutual CEO Stephan Frank came out today and expressed that Washington Mutual had adequate capital to with stand the drawdown. The question remains not if a bank run will occur but when.

Washington Mutual profited greatly during the property bonanza of the past 6 years. The majority of their sub-prime loans were made during the summer of 2006 which are set to reset either this summer or next. The 3 billion lost over the past two quarters will be dwarfed by future write downs. The models used to price these loans will have to take into account the increased risk of default, brought about by a slumping economy and increased oil prices. Washington Mutual had large exposure to Stockton and other California towns that have been hardest hit by the crisis. Their exposure will lead them to be the next bank to topple. The largest savings and loan will not last until Christmas. This will put pressure on the dollar because traders doubt the Fed’s ability to raise rates, in the near future.