Expert expects a big bank failure -- could it be WB or WM?

Posted Aug 19th 2008 8:39AM by Douglas McIntyre
Filed under: Forecasts, Wachovia Corp (WB), Washington Mutual (WM)

Several independent economists have said they expect a big U.S. bank to fail. It may be easy to ignore them because they are not affiliated with any of the large institutions that monitor financial companies. But now the former chief economist of the IMF says one of America's big banks will probably not make it.

According to Reuters, "The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said." Rogoff is currently an economist at Harvard.

The analysis pointing to the bank failure is based on the facts that the credit markets and housing situation will get much worse. Current earnings from banks and brokerage houses indicate that the prediction may well be true.

For investors, the issue is which large banks could go down. If stock prices are any indication, Wachovia (NYSE: WB) and Washington Mutual (NYSE: WM) are the most likely candidates. They have the weakest capital structures.

If a huge U.S. financial firm does become insolvent, it is not clear what would happen to the broader capital markets. The U.S. government might have to step in to prevent that malignancy from spreading in much the same way it did with Bear Stearns. Or, it may stand on the side lines and hope that there will be no domino effect. That could risk a partial meltdown of the U.S. banking industry. If one bank disappears, the stocks in others are likely to be pounded. That is bad for financials, which may have to raise more money.

Douglas A. McIntyre is an editor at 247wallst.com.

Tags: featured, IMF, Kenneth Rogoff, KennethRogoff, wachovia, washinton mutual, WashintonMutual, WB, WM

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Reader Comments (Page 1 of 1)

8-19-2008 @ 11:58AM

Sheldon L said...

Doug,

I would be very surprised if Washington Mutual does not survive. They have a growing commercial lending division that we closed a deal with yesterday. They have put a large number of properties up for sale to raise capital and they are not selling at bargain prices. In one of our properties, at a key location in Los Angeles they have negotiated a new lease to take over someone else's space. Everything I see, is they are proceeding to take corrective and effective action to return to profitability.

I cannot speak to the issue of Wachovia, but they may have expanded to quickly into a coming storm. Perhaps another reader can shed some light here.

I think there are others that are more suspect. However, those institutions are likely to seek mergers before they fall.

What is the track record of these economists in the prediction business? Probably not very good.

8-20-2008 @ 2:17AM

campdew said...

I presume that most who are airing and pushing these ambiguous suggestions are holding naked shorts of WB and WM. It's easier to make suggestion and innuendo than to hire actors to line up before bank branches at six am to withdraw all their funds. Negative rumors are so common in historic scheming that Rossini wrote the famous "La Calunnia" aria for "The Barber of Seville," wherein a vicious whisper becomes a cannon blast of destruction.

8-21-2008 @ 6:48PM

Tony V said...

Why does anyone lend credence to persons who speak to cause harm in the financial world.

It would be more beneficial not too publish such negatiivity. I, too, feel that these types of comments are made to serve some underhanded activity. Let's look for proof before we back such statements.