A ground-level view of a bank takeover
A ground-level view of a bank takeover
The bank I wrote about last week was the victim of a takeover robbery on Thursday night. Not by masked gunmen demanding the money out of customers’ wallets, but by barefaced Feds demanding customers’ deposits: Washington Mutual was taken over by the Federal Deposit Insurance Corporation, and the retail banking parts of it were immediately sold to JP Morgan Chase for a lower price than they would have sold for on the open market earlier in the week.
To understand the Washington Mutual (WaMu, pron. WAH-moo) situation, you need look no further than its very successful “bankers pen” series of commercials, which began airing in March of 2006. They were the brainchild of the Leo Burnett ad agency, and were reported on by AdWeek here.
In light of last week’s developments, it’s interesting to go to the YouTube site to read the comments posted on all the WaMu ads that are there. Initially when the ads were posted on YouTube, they got a very positive response—as they did out in the real world--because they reflected what most people feel about the banking industry in the U.S.
But now, many of the comments liken the ads to the current presidential campaign because of the physical similarity of “Bill” to Obama, and the bankers to McCain. Other commenters say WaMu was the victim of its own hubris in making fun of the banking industry in that way: So NOW who’s laughing all the way to the bank?
Well, Bank of America executives are probably laughing all the way to the bankers pen. A few months back, BofA launched a new series of ads that concentrated on certificates of deposits. CDs are short-term deposits, typically of at least $5,000, paying higher interest rates than regular savings accounts. CDs are very popular with customers whose origins lie in countries where banks pay interest even on current (cheque) accounts, and have good interest rates for on-demand savings. That’s most other countries in the world, by the way; in the US, you’re lucky to get even 1 percent interest on a savings account.
Typically, people with sufficient cash to do so shop around for the best interest rate on CDs. The best rate might be at a bank other than the one their salary goes into and from which they pay their day-to-day bills or mortgage. When the CD expires, depositors have the choice of either reinvesting or taking the money elsewhere, but if they want to take the money out early, some form of penalty is imposed.
As at 8/28/08, WaMu’s 1-year CD was paying a 5 percent interest rate, which is one of the highest available. But as rumors that WaMu might need to be taken over (“fail”), BofA began heavily advertising its 7-month CD, which has a 2.9 percent interest rate and which waives the early withdrawal penalty if you roll the money over into a BofA account. The popularity of this product is evidenced by today’s highlighted box on the first page of the on-line application process: “Due to a recent increase in the amount of applications, it may take 3 to 5 business days to process your application. Bank of America values your business and apologizes for any inconvenience that this may cause.”
[Full disclosure: In 2005, I moved my banking to Washington Mutual from the Bank of America because I was tired of BofA’s rapacious fees and disdainful customer service. WaMu and BofA—which began life as the Bank of Italy in San Francisco—are the major retail banks in the Bay Area, having the most branches and ATMs.]
Adding to the negative effect of BofA’s opportunistic advertising were the local TV news reports about Washington Mutual. You can see a sample of them at the Bay Area’s CBS affiliate’s website here—use “Washington Mutual” as your search term. To their credit, no news organization mentioned the multi-billion dollar run on the bank in the nine days prior to its being taken over by the FDIC and sold to JP Morgan Chase. It has been reported that the bulk of that money was taken out by big depositors, particularly institutional ones having more than the FDIC-insured limit.
But NOT to their credit, the news outlets seemed unable to resist using footage from the movie It’s a Wonderful Life, showing a panicked run on a bank. News items typically also did not take the time to explain the differences between now and the situation in the 1980s when uninsured S&Ls failed, just as they also haven’t been taking the time to differentiate between the circumstances of the Great Depression—when houses were foreclosed on at the first default, with people being literally thrown out into the street by law enforcement officers—and the wider financial situation today.
According to an August, 2008, Pew Research Center for the People and the Press article, the major source of news for most people (52 percent) is the local television news. There was a good mix of expert sources and voxpops in all the local bulletins I saw dealing with the WaMu situation. Voxpops have a special relevance at a time like this when people are taking counsel from as many places as they can—workmates, fellow commuters, people standing in line with them at the bank. When you worry that the boat you’re in might be taking on water, it’s not much use asking somebody in another—unpunctured—boat how they’re dealing with things.
But voxpops can also be a source of misinformation. In one mid-week bulletin, a woman leaving a WaMu branch was asked if she was worried the bank might fail. She replied that she didn’t bank there; she’d only been there to cash out her CD. Then she added that everybody “standing in line had yellow withdrawal slips in their hands”. Well, WaMu doesn’t have separate slips for deposits and withdrawals—there’s one slip divided into two sections and it’s yellow.
It’s easy to see how that comment might parlay into someone saying they’d heard on the TV news that “everyone is withdrawing their money from WaMu,” causing concern to any WaMu customer who didn’t know the statement was based on a faulty assumption by someone who wasn’t, in a day-to-day sense, even a customer of that bank.
But what-the-hey! From a depositor’s point of view, being taken over by JP Morgan Chase isn’t the worst that could have happened. Things will just continue as normal until the changeover is complete in six months’ time. The ultimate irony for me is that a couple of months ago I was musing with a workmate in San Francisco about whether the declining economic situation would lead to people jumping out the windows of the skyscraper next to the plaza where I usually went to have my lunch.
That was the JP Morgan Chase building, and instead it is me being catapulted IN their window by their mates in the bankers pen.