The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History by Grind Kirsten

Author:Grind, Kirsten [Grind, Kirsten]
Language: eng
Format: epub, azw3
Publisher: Simon & Schuster
Published: 2012-06-11T21:00:00+00:00

Chapter Eight

PROJECT WEST

Things could get a lot more difficult for you.

—Treasury Secretary Henry “Hank” Paulson, Jr.

There is a line in Robert Frost’s poem “The Black Cottage” that Sheila Bair once quoted in a speech in 2007. The poem is both grim and nostalgic. It tells about two men out for a walk, one a minister, who happen upon a house that has remained untouched long after the woman who owned it died. Bair, in her job as chairman of the Federal Deposit Insurance Corp. for about a year, quoted to her audience, “Most of the change we think we see in life / Is due to truths being in and out of favour.”1 Bair is fond of quoting Frost. She would later, in an acceptance speech for a prestigious Profile in Courage award, borrow another of his famous observations: “A bank is a place where they lend you an umbrella in fair weather, and ask for it back when it begins to rain.”2

Bair was trying to explain the recent actions of her agency. The FDIC was spending time and money preparing for the failure of a giant U.S. bank, even though it had been a record two and a half years since any bank in the country had failed. “But who’s counting?” Bair joked at the time. She had spent much of her first year at the helm of an agency that oversaw some 8,500 banks dealing not with banks at all but with a big-box store that wanted to become a bank. Wal-Mart had filed what’s known as an “industrial loan company” application, which would allow it to offer limited bank services. The application was controversial.3 Wal-Mart claimed it was just trying to cut the costs of processing customers’ checks, but banks and credit unions were sure the company was trying to find a way to run its own commercial bank.4 Bair solved this problem in an unusual fashion—by doing nothing at all. The FDIC’s board of directors put a moratorium on industrial loan applications for six months, then extended it by another year. Frustrated by the delay, Wal-Mart eventually withdrew its application.

Now Bair was telling her team to focus on what was seemed like an unrealistic scenario: the fall of a financial institution with tens of billions of dollars in assets. The FDIC had formed a new unit to study more than 100 banks with $10 billion in assets or more, observing their strengths and weaknesses.5 This strategy was another departure for the agency: historically, it had worried more about the thousands of small community banks across the country. The new FDIC unit ran through role-playing scenarios, each person in the group pretending to be a banker, or someone at the U.S. Department of the Treasury, or someone at the Federal Reserve Bank. What would happen if a big investment bank failed? What would happen if a big investment bank failed with operations in other countries? The FDIC studied how the different government agencies would work together, and how they would handle the failing bank.

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