Washinton Mutual and the developing financial crisis:

I Have not blogged in a bit due to work, school (masters, go me!) and my Family obligations (HI Willa, Amy and Baby xxxxx). But today, after reading about the difficulties that Washington Mutual Bank is having, I wrote to the editors at ABC.com and they published my thoughts as a post after their story. Here is my response in full:

Washington Mutual deserves what it gets.

I am an average consumer that could see that Washington Mutual was being mis-managed. If I could see it then why could banking industry experts not see the position the bank was in? Here are the signs that I saw:

A little over a year ago the marketing wizards in the bank decided that the banks well regarded seasoned conservative name should immediately be changed to "WAMU". This so wretched that today the national media will not even refer to this moniker and still use the older, more formal Washington Mutual name. About two years ago Washington Mutual went on a bank buying spree and bought up banks with an emphasis on credit card marketing. Credit cards are a high fee item in banking, but are terribly risky due to the fact that the credit they represent is not tied to collateral.

So by having a high emphasis on credit cards, the bank was betting on the high fees offsetting the possible losses inherent in the credit card business. After buying up several banks such as Providian bank (lots of credit card accounts), WAMU became one of the leaders in the industry in placing high default rates on their credit card customers. They also stopped giving customer service associates the ability to change credit rates for customers.

So if a customer called up and said, that they were one day late on a payment by making an error, they were told that the rate was determined by computer, and that if they paid their bill they would likely see a decrease in the interest rate after several months. Additionally, the rate would never revert back to the original rate on the card. This resulted in very high fees for the bank and artificially made the bank show a good return for its shareholders.

The problem in both this interest game and in the sub prime mortgage market is that when customers go into a default rate, they are much less likely to be able to pay off the principal. And if the bank will not adjust rates, than their defaults skyrocket as customers start to refuse to pay.

The difference between a Washington Mutual credit card rate of 13.99% and the default of 28% (Yes hard to believe) is: at 13.99% you pay approximately $560.00 interest each year on a $4,000 balance. At 28% a customer must come up with $1,120.00 each year in interest!

The federal government has actually enabled this type of outcome. Years ago, a bank was never allowed to charge more than 21% interest for anything. Several years ago these laws were modified, and now a bank can charge anything it likes as long as the rate is somewhere in the contract that you sign. This sounds good for shareholders. But, what happens to the shareholders when the customers have no confidence and start taking their business elsewhere?

The banks that are still standing are the ones that were being criticized by shareholders for low earnings last year. Perhaps they had managers who truly understood the system and recognized that while the other banks were giving good returns in the short term, they were endangering themselves in the long term. As I said at the top, Washington Mutual deserves whatever it gets. Let’s hope what it gets is not a bailout.

Picture day


I have not blogged in a very long time, so I decided to throw up some pictures for anyone that might come accros this dusty wasteland. They may not make sense to the casual reader, but they make me smile...

"The Axis of Evil"

ok, supervillains, lets get our brains together and plot

world domination!

"I'm Drunk and I'm goin outside!"

You laugh, but I fear that our big girl will

someday fit in those boots.

These things keep me up at night!