WaMu and Unintended Consequences

From today's Christmas Eve edition of the NYT comes a story that illustrates yet again the impact of unforseen and unintended consequences. Ned's friends will be aware that he has from time to time decried the hasty and ill-considered seizure of Washington Mutual, one of the country's largest financial institutions, by the FDIC in 2008 in what can only be described as a fit of pique and panic. The assets of the bank were then practically given to J P Morgan Chase. This cost thousands of employees, retirees, and ordinary struggling middle class persons billions in lost pension assets and monthly dividend income, never to be regained. But one unintended consequence of the seizure has been the exacerbation of the commercial real estate crisis in Southern California, as if that benighted region needed another calamity. It seems that several large new office buildings had been recently built, and had been issued mortgages equal to about 3/4 of the assessed value of the buildings, so they seemed safe. Moreover, the buildings were ENTIRELY LEASED to, you guessed it, WASHINGTON MUTUAL. So, if the FDIC had simply helped WaMu like they helped Citi, Chrysler, GM and a host of others, WaMu arguably could have survived, and continued to pay the leases on the buildings. But when WaMu was seized, the buildings' owners lost the major source of revenue that underwrote the payment of the mortgage. For some reason, the leases did not transfer to Chase when the FDIC gave Chase WaMu's assets.
The result? The buildings failed to find new tenants and the mortgages of far more than $100 million became delinquent. The buildings were finally sold for far less than the value of the mortgages, meaning that the junior note holders lost everything they had. And such a loss sends shock waves through the commercial mortgage market, much like the hysterical reporting over the Gulf spill gave rise to a sense of panic, making real losses far worse as people stayed away from hotels thinking the Gulf was awash with oil.
Thus our Christmas story of (un)-happy endings. George Bush and his regime: the gift that keeps on giving.