Fannie, Freddie just the tip of the iceberg

October 27th, 2008 at 06:28pm Annette LaCross

Published Sept. 15:

Just so you know, this isn’t the column I planned to write this week. In fact, it’s the fourth.

But of all the hullabaloo in the financial markets of late, this one is by far the most significant — certainly the most foreboding.

The original column was about recessions — what they are, how to get there and how to identify one once you’re in it. Given the state of things, it seemed relevant.

Then came the recent call to challenge your property assessments in Winnebago County. Just announced, it seemed particularly timely.

Both became less so last week. I abandoned them after Treasury Secretary Henry Paulson announced the federal bailout of floundering mortgage giants Fannie Mae and Freddie Mac. There’s a lot of confusion about the two companies and their roles in the overall economy, it seems. I can deal with that later, too.

All of it paled next to another Wall Street announcement last week. It didn’t get anywhere near the attention that swirled around Fannie and Freddie, but I fear it will prove far more consequential:

Kerry Killinger is out of a job. As of last Monday.

His isn’t a name you would immediately recognize, and anyway, it’s not the important part. The important part is the timing of the announcement.

Killinger is the now-former CEO of Washington Mutual Inc. The nation’s largest savings and loan gave him the boot a day after Paulson’s announcement.

Not that his board of directors didn’t have cause. WaMu shares have fallen nearly 90 percent since July 2007. The thrift has lost nearly 70 percent of its market value this year alone.

But it sure took them long enough.

Three other major banks made the move months ago. Merrill Lynch & Co.’s Stanley O’Neal and Citigroup Inc.’s Charles Prince were forced out nearly a year ago, when their banks’ respective portfolios — led by collapsing mortgage-backed securities — fell off a cliff. Same at Wachovia Corp., although CEO Ken Thompson managed to hang on to his job until June.

About the same time, WaMu’s board finally responded to investors’ dwindling confidence in Killinger’s leadership and stripped him of his chairman title.

A thrift, remember, is strictly a retail bank — it handles consumer business, like, say, checking and savings accounts. And it counts much of its wealth in the strength of its — you guessed it — mortgage loans.

Makes me wonder what the WaMu board was waiting for.

Why fire Killinger now? If the man was trustworthy — and I use the word cautiously — enough to lead the company this far through the crisis, closing the barn door at this stage seems a little counterproductive.

But they can read. And the writing on the wall is only getting bigger.

The house of cards that Wall Street built is about to come crashing down, and banks will face their real comeuppance.

And, once again, we’ll be forced to pick up the tab because only our rich Uncle Sam can deal with the global consequences of the collapse of the big investment banks.

Certainly it’s already started. Fannie and Freddie are just the tip of the iceberg.

The day after Killinger got his pink slip, investment bank Lehman Brothers faced a run on its stock because it doesn’t look like it will be able to raise the capital it needs — a tune hauntingly like that of Freddie Mac.

The Detroit Three have joined the chorus, too — a bill working its way through Congress would commit billions in low-interest loans to General Motors Corp., Ford Motor Co. and Chrysler LLC.

The Federal Deposit Insurance Corp. has called on the feds to keep an eye on banks — and the paltry amount of money the FDIC has in reserve to insure the funds held by failing banks.

With all of those headlines competing for space, it’s not surprising that WaMu’s announcement was greeted with a yawn. It’s just another CEO termination, after all.

Unless it isn’t. Unless the board thinks it may need to justify help from Uncle Sam.

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