The financial health of the banking industry was a subject of discussion and intense speculation all week.
- It started last weekend with the U.S. Treasury deciding to nationalize Fannie Mae (along with Freddie Mac). This is a move that, if carried through, is likely to cost $1 to $3 trillion before it is all over (I suppose that would make it the most money ever to be spent subsequent to one weekend crisis meeting in Washington), so a lot depends on how Congress, the Treasury Secretary, and the President react when the $200 billion limits are reached. That could happen before the end of the year unless U.S. real estate values increase sharply from their current levels. Fannie is said to be essential to the continued operations of the U.S. banking system as we know it, yet its excesses contributed mightily to the current troubles in the financial sector.
- On Monday, Warren Buffett started to back out of the deposit insurance business. Buffett soon confirmed that the Berkshire Hathaway subsidiary Kansas Bankers Surety Co. has started to notify its 1,500 customers that it will no longer issue bank deposit guaranty bonds, a form of deposit insurance for businesses and investors with deposits over the $100,000 FDIC limit. There are still several competing companies in that business, but Buffett’s exit has been widely seen as a vote of no confidence in the banking sector.
- All week long there have been conflicting reports about the future of Lehman Brothers, one of the largest brokers on Wall Street. A report that Bank of America would lead a buyout now appears to have been overly optimistic. According to widely reported hearsay, Treasury Secretary Henry Paulson opposes the use of government money to keep Lehman Brothers operating. As of Friday afternoon, the most likely scenarios seemed to be that three or more large foreign banks could get together to buy a majority stake in Lehman, or that Lehman could start shutting down most of its operations. In the latter scenario, the thought is that its investment funds, at least, could continue. This could be a very long weekend, according to John Authers writing in the Financial Times.
- The rumors swirling about Washington Mutual (Wamu) are not quite so ominous, but the bank this week insisted that it has sufficient capital to carry on its business and released selected financial measures early to try to reassure investors. Instead, Wamu’s stock ended the week at 2.73, a third lower than a week ago and a fifth of what it was at the beginning of the year.
When Friday night rolled around, there were no bank takeovers to announce, leaving some to say that the banking system must not be in such bad shape after all.