On Friday, with its stock plunging 27 percent, Wachovia experienced a “silent run” on deposits, but the bigger worry for regulators was that other banks wouldn’t provide the Charlotte bank with necessary short-term funding when it opened for business Monday, sources familiar with the situation told the Observer.
With Wachovia already looking for a merger partner, the Federal Deposit Insurance Corp., in consultation with other regulators, required the bank to reach a sale to Citigroup on Monday morning.
The FDIC, for the first time, used legislative authority created in 1991 to help it deal with a “very large complex bank failure” on short notice. It requires approval from heavy hitters ”“ two-thirds of FDIC board members, two-thirds of Federal Reserve board members as well as the Treasury secretary, who must consult with the president.
“When Wachovia opened Monday it would not have had a source of liquidity,” a source familiar with the situation said. “It really could not have opened under those circumstances. That’s why (the FDIC) put together the assistance package.”
“but the bigger worry for regulators was that other banks wouldn’t provide the Charlotte bank with necessary short-term funding when it opened for business Monday”
So the problem was Wachovia had spent its depositors’ money, and when their finance models proved wrong, the depositors naturally wanted their money back, and Wachovia was faced with being unable to get loans to pay its customers who had paid Wachovia to safeguard their funds. I doubt Wachovia would be so accomodating if I played the same sort of juggling act with my checking account.
One could easily ascertain that the Bank is kiting deposits owned by the depositors. Could an attorney join in for clarification?
Thanks,
Intercessor
Last Wachovia commercial I saw had money falling from heaven for its customers. Now look it happened! Gee, that must be the bank for me, right? But I bet they charge late fees and overdraft fees for customers who make math errors in the checkbook. There’s a parable about debtors floating around here for sure.
All banks are run this way. Of course there is not enough cash available for every depositor. You guys know that.
But, hey!, lets punish Wall Street………
Alas, I have never had a bank shower me with money! They all expected to be paid back at interest. I just don’t know the right ones I guess. And they have all wanted that 20% downpayment bit on my mortgage loans.
Bob,
The point to be taken from this is that our monetary and banking system is fundamentally unsound. But because the banks are a government-sponsored cartel with a printing press, they can do what would be called fraud and check kiting by you and me.
[url=http://apnews.excite.com/article/20081003/D93J1IA00.html]Wells Fargo acquires Wachovia[/url]
Much better deal for Wachovia stock holders and for the taxpayer = no government intervention required.
Intercessor [#2] and Byzantine [#1 & 6]: Depositing money in a bank is not like checking your coat, parking your car in a garage, or stashing jewelry in a safe-deposit box.
If you deposit $2000 in a bank, the money becomes property of the bank; the bank, in turn, owes you $2000. (The bank’s total assets and total liabilities each increase by $2000.)
Although we speak of your having $2000 on deposit in the bank, the legal and business reality is simply that you have a $2000 claim against the bank: you are a creditor of the bank.
George Bailey, the small-town banker played by Jimmy Stewart, aptly summarized banking in Frank Capra’s 1946 film, It’s A Wonderful Life. When panicky depositors demanded their money, Bailey replied:
“You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house . . . right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others.”
This is the essence of banking. There is nothing sinister about it, nor does it result from any government-sponsored cartel. This is how banking worked before governments regulated banks. You can see it in the laissez-faire Scottish banking system praised by Adam Smith. This system had free entry, no monetary policy, and virtually no government regulation.
#8 Thanks Irenaeus–Depressing to know that I own a piece of Potterville.
Intercessor