Last night, the troubled financial system had to absorb two fresh blows: the failure of Washington Mutual and the failure of the White House and Congress to reach a consensus on a proposed bailout package for banks like Washington Mutual. The big irony? The failure of a bank with $307 billion in assets, the largest bank failure ever by far, is causing the tiniest of ripples, while the failure of business as usual—who could have imagined that the Bush administration would be unable to bring along its allies in the House and Senate?—is inducing rage and panic among CNBC talking heads.
It is a tale of two systems. One system, the one used to process failed and faltering banks, works really well. It's been in place and evolving for 75 years, since the Federal Deposit Insurance Corp. was founded (over the opposition of bankers, it must be added). Since then, not a penny of depositors' money has been lost, and the banks continue to insure themselves against their own incompetence. The FDIC insurance fund contains about $45 billion, and analysts had feared that the failure of a bank the size of WaMu (it had $188 billion in deposits) would swamp the fund. But the FDIC has a professional staff, run by a highly competent and intelligent manager, Sheila Bair. Having already handled a baker's dozen of failures this year, the FDIC has the drill down.
There are also, thankfully, a few competent bankers left in the world. Many of them work at JPMorgan Chase, which has agreed to acquire WaMu's business. WaMu's failure will cause real dislocation—stockholders and many boldholders are likely to be wiped out. But WaMu's depositors will be made whole. The FDIC won't have to dip into the insurance fund. JPMorgan Chase is assuming WaMu's troubled mortgage business. It will take a charge for those bad debts and raise new capital from the private sector to deal. It's a big headline and a big story, but in the scheme of things, a blip. A large boat slipping silently below the sea while all the passengers escape with their lives. This system is a force for order.
The other system—the process by which Congress and the White House make legislation—is an OK system in the best of times, and a completely FUBAR one at the worst. It has many competent and well-meaning professionals in it. But it also has a bunch of incompetent malefactors. For the past week, this system has been lurching toward a proposal to bail out banks by raising taxpayer funds to purchase bad assets. The plan, released last Friday, was the brainchild of Treasury Secretary Henry Paulson and was instantly endorsed by President Bush and Federal Reserve Chairman Ben Bernanke.
Last weekend, Congress got involved. And throughout the week, all parties involved gave the outward impression that they were moving toward an agreement. On Wednesday, a senior official involved in the talks assured a group of journalists that the grownups were in charge. Only they weren't. Democrats, who control Congress, were unwilling to pass what amounts to a massive tax increase on their own. Senate Republicans signaled their willingness to go along, but House Republicans said they wouldn't provide any votes. Nonetheless, Wednesday night President Bush addressed the nation, warning of dire consequences unless the bailout plan was passed. He proclaimed an era of good feeling—"there is a spirit of cooperation between Democrats and Republicans, and between Congress and this administration"—but didn't seem to expend much effort whipping House Republicans in line. John McCain suspended his campaign and parachuted into Washington, forcing Obama to attend a staged meeting at the White House.
Throughout Thursday, word was leaked that the contours of a deal had been agreed upon. The markets rallied. Last night, the word came that there was to be no deal. The evening ended with Treasury Secretary Paulson begging House Speaker Nancy Pelosi to save the economy, but conceding that the real problem was his fellow Republicans. Friday morning, the markets were emitting a primal scream. This system is a force for chaos.