The Fall of Washington Mutual

Washington Mutual is perhaps one of biggest banks to collapse in American history. In 2008, after 119 years of operation, the bank was brought to its knees after the Recession hit.

What caused the banking giant to fall? It was a combination of things. First, Washington Mutual gave insanely generous loans to corner the market on middle-class consumers. It wanted to be the “Wal-Mart of Finance.” Sadly, this sent the bank to its ultimate doom when the 2008 Crash rolled in and consumers started defaulting on their loans.

Trying to control the panic among depositors and investors, Washington Mutual began reorganizing its Home-Loan Division, laying off more than 22% of its staff. That’s when things went from bad to worse.

Investors, seeing the banking giant losing its grip, decided to bail ship. Suddenly, there was a massive run on Washington Mutual as many depositors withdrew their funds from their accounts and investors tried to get rid of their stock.

It was a race to the bottom and Washington Mutual was losing big. The management tried to negotiate talks with other big banks seeking financial help and a possible buyout. They got nowhere. They received only one offer from J.P. Morgan Chase and it was for $4 a share. They rejected that offer.

By now, things were hopeless. The company tried to prevent further backslide by stopping wholesale money lending and it even tried to replace its CEO. Nothing worked.

It was finally apparent that nothing would save the banking giant, and the Federal Deposit Insurance Corporation (FDIC) seized the bank and brought its horrible year to a close. Depositors were given their money back. Investors got nothing.

This is why you can never assume that a bank is a stable investment. Because anything is possible in the world of finance.

Consumer Cyclicals Vs. Consumer Staples

There are two kinds of goods in the market that every investor needs to know about: consumer cyclicals and consumer staples.

Consumer cyclicals include things like electronics, movie tickets, and other somewhat unnecessary items. Consumer cyclicals are items that are bought specifically for enjoyment, and they often fare worst in bad economic times. Because when money is tight, nobody wants to spend their money on those things.

Then there are consumer staples. Consumer staples are goods that are essentially necessities — like milk, eggs, oil, and paper. These kinds of things are not wants, they are needs. This makes them more valuable in tough economic times.

Consumer cyclicals are goods for people who want it. Consumer staples are for people who require it.