Both Lehman Brothers Inc. and Washington Mutual Inc. are testing record
lows as the market reflects concern that the two may fail. But while
they're viewed by many in the same light -- after all they're "banks"
-- it's worthwhile to step back and think this through. In fact, they
are quite different, with different economics and different regulators.
A "collapse," if that's what we're talking about, would unfold
differently as well.
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Lehman is an investment bank, WaMu a thrift. Although these terms
have lost some meaning since the end of Glass-Steagall and other
Depression-era bank regulations -- look no further than universal banks
Citigroup Inc. and J.P. Morgan Chase & Co. -- Lehman and WaMu do mostly
fit the old models. And while neither of them is as large as Citi or
J.P. Morgan, a failure would have systemic repercussions, though at
this point we don't have a clue about their scale. Those repercussions
would, however, be very different.
The two institutions also have to deal with very different
regulatory schemes. In the case of Lehman, the onus falls on the
Federal Reserve, which since the Bear Stearns Cos. implosion has taken
on responsibility for Wall Street. How the Fed might act is very
unclear, since there is only one precedent -- Bear Stearns. The Fed is
exploring new territories against a backdrop of a waning
administration, an uncertain role in financial regulation going forward
and a federal government that has just reached out to rescue two giant
mortgage underwriters, Fannie Mae and Freddie Mac. How will those
factors affect the Fed and Lehman? We can only speculate.
In
the case of WaMu, the onus is on the Federal Deposit Insurance Co. and
the Office of Thrift Supervision. The OTS would be in the room if WaMu
failed, but the burden would fall on the FDIC, which has already been
straining under the load of recently failed IndyMac Federal Bank.
Still, the FDIC has been dealing with these situations for many
decades. WaMu is not IndyMac; except for its mortgage exposure, WaMu
has lots of attractive assets, including a national branch network and
a hefty deposit base. In all probability, the FDIC would want another
institution to quietly take over WaMu, then work out some means to deal
with the bad loans (something it did do with IndyMac). Again, while
WaMu could threaten the FDIC because of its sheer size, the federal
insurer has a variety of ways to limit its exposure and to raise new
funds. There was this thing called the S&L crisis once.
These two situations also have very different economic dynamics.
WaMu has a large deposit base that it can fall back on to fund its
operations. OTS and the FDIC will pull the plug on WaMu when it's
apparent that its losses have impaired its capital base; the timing
could depend on the presence of a buyer or buyers. As an investment
bank, Lehman depends on the market for its daily funding, and the
market these days, based on its thudding share price, is getting very
nervous. Lehman is more like Fannie and Freddie. The stock price is
important, but the real signal that the end is near will come when the
price of its overnight financing begins to rise, forcing the Fed to
make some decisions. The fact is, given how long Lehman has struggled,
it may resemble Drexel Burnham Lambert, which was allowed to fail, more
than Bear, which was "rescued" by J.P. Morgan. That may well depend on
the Fed's estimates of the effect on the system of a failure. With talk
of a possible credit downgrade at Lehman, that eventuality is a lot
closer today than a few weeks ago.
Of course, for federal
regulators the best solution to both problems would be a buyer or, even
better, survival. Both those options may prove easier for WaMu than
Lehman. - Matthew Wurtzel
Troubled Wall Street
Prices at 11 am EDT Thursday |
| Name |
Price
at
close |
Price
at 11:00 |
Change |
Mkt cap |
| J.P. Morgan Chase & Co. |
39.4 |
39.5 |
0.1 |
135763.07 |
| Lehman Brothers Inc. |
7.6 |
4.49 |
-2.76 |
3117.86 |
| Merrill Lynch & Co. |
23.3 |
20.21 |
-3.09 |
30900.65 |
| Goldman Sachs Group Inc. |
157.59 |
151.03 |
-6.56 |
59476.34 |
| Morgan Stanley |
38.92 |
37.37 |
-1.55 |
41443.85 |
| Citigroup Inc. |
18.68 |
17.89 |
-0.79 |
97418.08 |
| Fannie Mae |
0.85 |
0.79 |
0.05 |
842.27 |
| Freddie Mac |
0.66 |
0.64 |
-0.02 |
413.12 |
| Bank of America Corp. |
32.4 |
31.69 |
-0.71 |
144509.97 |
| Wachovia Corp. |
15.08 |
13.96 |
-1.11 |
30148.41 |
| Washington Mutual Inc. |
2.32 |
2.02 |
-0.3 |
3444.83 |
Source: The Deal |
