The Peculiar Timing of WaMu’s Demise

As if there weren’t enough news going on already, Washington Mutual goes belly up in the largest bank failure in U.S. history, and JP Morgan Chase buys up all its pieces.

WaMu was one of the more notorious subprime lenders – remember this pool of WaMu Alt-A loans we talked about last spring, the one where all the loans were quickly going into default? – so its failure wasn’t unexpected. But as Steve Waldman at Interfluidity points out, why was WaMu seized by the government on a Thursday? The Federal Deposit Insurance Corp. uniformly announces bank failures at the end of the day on a Friday, to reorganize things for Monday and to avoid setting off any bank runs or panic.

But WaMu’s demise comes out in the midst of tense negotiations over a $700 billion bailout of Wall Street that the Treasury Department and the Bush Administration say are desperately needed to stabilize the nation’s financial system. An agreement on the bill seemed on track early Thursday, but by the evening the talks had imploded.

Admitting it’s possible he’s just another conspiracy theorist, Waldman nonetheless can’t help asking the question the Thursday failure begs: Why did Friday come early this week, of all weeks

I am dark. Secretary Paulson could have offered any number of proposals to help ensure that this collapsing house of cards is a controlled demolition. He and Dr. Bernanke had months to put together policy options, long months between the fall of Bear and the fall of Lehman to create orderly processes for disorderly events they knew could come. At the last moment, they offered one option, a particularly unpersuasive plan imperiously presented as a fait accompli. When Congress balked, they relented and offered a few crumbs so that the people we elected could nibble at the edges without altering the core. And today, when it looks like those crumbs might not have been enough, we have the largest bank failure in American history, announced, oddly, on a Thursday night

When all this is over – I say that with a sense of hope rather than any proof that there’s some good ending here – the timing of both the Treasury plan and the WaMu seizure will be scrutinized closely. Shut down a bank when you don’t normally do in the middle of a pitched battle and you’ve raised some serious questions. Are the markets really that close to failing? Or does the government just want its way?