It’s easy to mix the 2, but what you need to seperate is Capital requirements and ability to pay obligation. Capital is cash the bank has free and clear or doesn’t owe anyone, while liquidity is the banks ability to pay obligations.

WaMu needs only to hold capital = to 6% of assets, but it can’t have that number drop any lower than that to be considered well capitalized.

“In the banking case, doesn’t liquidity mean the ability to borrow when necessary (either from depositors, selling stock, the government or private equity)?”

Any of these will add extra cash, but issuing stock will piss of current shareholders because it will dilute their value (less desirable)

“So WAMU was done in by institutional depositors pulling their rather large deposits?”

Yes, they had sufficient capital to cover losses arising from the assets they own and maintain the 6% requirement (capital ratio), but they didn’t have enough cash to pay back the liabilities (run-offs)

Hope that helped

Do tell!

I think I have used them interchangeably (not in banking lingo, however).

In the banking case, doesn’t liquidity mean the ability to borrow when necessary (either from depositors, selling stock, the government or private equity)?

So WAMU was done in by institutional depositors pulling their rather large deposits? Clearly, nobody wanted to lend to them anymore (look what happened to that TPG group).

Maybe it could have helped alleviate some concerns from the capital story, but I don’t think the shareholders, speculators, rating agencies and regulators were convinced a work out program would have materially helped.

Remember, WaMu was “well capitalized” as of Thursday, but just because a bank is “well capitalized” from a regulatory requirement perspective, it doesn’t mean it’s protected from a massive bank run and this was what happened. There’s still quite a bit of confusion between liquidity and capital I imagine.

Wachovia Launches Option-ARM Project – September 25, 2008
By MortgageDaily.com staff

Story Highlights

Wachovia Corp. is outsourcing the refinancing of its option adjustable-rate mortgages into government (FHA) and conforming (Fannie Mae & Freddie Mac) loans.
Wachovia hopes to restructure about 135,000 option ARMs in California.
In some cases, Wachovia may carry a new second mortgage for the amount above the maximum FHA or conforming limit.
The struggling Charlotte, N.C.-based bank reportedthat it charged of around $0.5 billion in option-ARMs during the second quarter. The loan-loss reserve build for option-ARMs was $3.3 billion.
California is phase one in a pilot program for the next 60 days, If the pilot period is deemed successful, the project is anticipated to run for one to two additional years.
Eligible borrowers must be current on their loans and occupy the properties being refinanced.

Wachovia unilaterally dropped all prepay penalties in June of this year. Very decent of them.

I’m sure WaMu has a breakdown, but just think of it this way…mom and pop deposit (core deposits less than $100K) runoffs have historically been minimal. Commercial deposits (deposits greater than $100k) are usually the first to go. I suspect the later was the bulk of the run-off. I beleive WaMu had ~$40BN in commercial deposits at the end of Q3.

There maybe a paradigm shift in thinking though as even core depositers may be questioning the safety of banks and the FDIC. One of the changes I see happening is people will be smarter about where they put their money and there will be mechanisms created to ensure they can transfer their deposits faster and more economical.

They got a great price, $1.9BN for $140BN of deposits not including the loans. Let’s just assume they generate1% of fees on the deposits….that’s $1.4BN alone. I also see them recovering $5-6BN of that writedown.

I don’t know the final withdrawals number, but I know it was ~$10BN last week alone.

BTW, the P-I reported over 15 billion in withdrawals in less than 2 weeks. I assume that’s net withdrawals.