Washington Mutual, which was bought by JP Morgan after being grabbed by the US authorities late yesterday, was a major player in the controversial “option ARM” mortgages which allow borrowers different options in setting the level of their own repayments. The failure of Washington Mutual broke confidence in a large group of well known bank today, as investors tried to figure out the implications of the largest collapse of a major bank on record.

ARM mortgages, which were popular at the height of the housing boom, have proven to be gigantic liabilities for banks.Other firms known to hold them saw their stock prices fall greatly today.

Wachovia, a national chain with 3,000 branches and assets of $812bn, saw its shares nose dive by 21% during early trading in New York.

Details are emerging about the run on the assets of Washington Mutual, known as WAMU, in the days leading up to its seizure. The Office of Thrift Supervision said customers withdrew $16.7bn of deposits in 10 days, beginning on September 15 – the day Lehman Brothers declared itself bankrupt, sparking a crisis of confidence in the larger banking system.

This brings us to our question – what exactly does the FDIC cover and why did so many people scamble to get their money out of WAMU?

FDIC insurance covers all types of deposits received at an insured bank, including deposits in checking, NOW, and savings accounts, money market deposit accounts, and time deposits such as certificates of deposit (CDs).

FDIC deposit insurance covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank’s closing.

The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if these investments were bought from an insured bank.

The FDIC does not insure U.S. Treasury bills, bonds, or notes. These are backed by the full faith and credit of the United States government.

How much insurance coverage does the FDIC provide?
The basic insurance amount is $100,000 per depositor, per insured bank.

The $100,000 amount applies to all depositors of an insured bank except for owners of certain retirement accounts, which are insured up to $250,000 per owner, per insured bank.

Deposits in separate branches of an insured bank are not separately insured. Deposits in one insured bank are insured separately from deposits in another insured bank.

Deposits maintained in different categories of legal ownership at the same bank can be separately insured. Therefore, it is possible to have deposits of more than $100,000 at one insured bank and still be fully insured.

The following sections describe the eight ownership categories recognized by FDIC regulations and the requirements that must be met to have coverage beyond the basic $100,000 insurance amount.

Tomorrow we will begin to identify the eight ownership categories with facts about each.

http://http://www.fdic.gov/index.html

Acquisition of Washington Mutual Bank

September 25, 2008

Banking operations of Washington Mutual, Inc were sold in a transaction facilitated by the Office of Thrift Supervision (OTS) and the FDIC. All deposit accounts and all loans have been transferred to JPMorgan Chase Bank.  

•  JP Morgan Acquires All Qualified Financial Contracts as Part of Washington Mutual Acquisition
• Washington Mutual Bank Investors – Additional Information
• Continuation of Contracts Transferred From Washington Mutual Bank

I am going to start a series of articles to give some insight into what is going on in our economy.  I am not giving financial advice but just my opinion based on certain facts.  Stay tuned!