Top 15 For 2008 (No. 3): Bank Runs

January 28, 2009 5:20 PM EST has put together its 'Top 15 For 2008' which chronicles our view of the most significant news on Wall Street during the tumultuous year.

Number 3: Bank Runs

A "bank run" was something we only read about in history books or saw watching holiday favorite "It's A Wonderful Life", but all that changed in 2008. With the collapse of the financial system, bank runs again were back in our vocabulary. A bank run is a mass customer exodus of assets from a financial institution on fears of insolvency. Because banks only keep a small amount of deposits on hand and lend the rest out, a bank run can force a failure of the institution.

The U.S. subprime debacle exposed the balance sheet of the world's banks, and what people saw was scary. With the crash in housing values, "assets" the banks held on their books, like subprime, Alt-A and even prime mortgage loans, were worth far less than prices being carried. The securitization process, a means to packages mortgage securities together and sell them to investors, was drying up. It wasn't long before credit losses and mark-to-market write-downs on these assets began to strain the liquidity of the banks.

UK bank Northern Rock was one of the first major casualties. In late 2007, Northern Rock reached out to the Bank of England for liquidity assistance. Problems were exacerbated as the issues at the bank led to a situation where customers were lining up at branches to withdraw their savings. In February 2008, after a private takeover of the company failed, Northern Rock was taken into state ownership.

In January, the largest U.S. mortgage lender, Countrywide (NYSE: CFC), was forced into the hands of Bank of America (NYSE: BAC) as losses on mortgage assets piled-up.

In March, it was the failure of Bear Stearns, which while an investment bank, was heavily involved in the subprime mortgage market and was running on extreme leverage. Fears of illiquidity caused investment clients to pull their money from Bear Stearns and it was forced to run to JPMorgan (NYSE: JPM) to sell itself in a fire sale with the assistance of the U.S. government.

In July, liquidity problems caught up to IndyMac Bank (NYSE: IMB) and the FDIC was forced to takeover the bank. In an 11 day span of time, depositors withdrew more than $1.3 billion from their accounts. IndyMac was one of the largest Alt-A mortgage lenders.

In September, the FDIC seized control of Washigton Mutual (NYSE: WM) and struck a deal with JPMorgan (NYSE: JPM) to buy the bank's deposits and branches. WaMu was the U.S.'s largest savings and loan. Regulators said WaMu had suffered an exodus of $16.7 billion in deposits over a small period of time.

Also in September, Citi (NYSE: C) agreed to acquire Wachovia (NYSE: WB) with the assistance of the U.S. government and the FDIC after a mass client exodus. A few days after the news, Wells Fargo (NYSE: WFC) came in with its own, higher bid, for Wachovia. Wachovia went with the Wells Fargo deal, which involved no federal assistance.

Also is September, Lehman Brothers (NYSE: LEH) filed for bankruptcy as investors fled the firm as securities losses at the company made it insolvent. The U.S. government took a hard line on Lehman, not assisting in a takeover. Some claim this was one of the government's biggest mistakes during the crisis.

In October, PNC Financial Services Group, Inc. (NYSE: PNC) bought National City (NYSE: NCC) in a take-under, as fears of customer exodus forced the bank's hand.

In November, the U.S. government rushed in to save Citigroup (NYSE: C) on fears the plunge in its stock price could have sparked a bank run.

Due to the bank run problem, the FDIC was forced to increase the deposit insurance limit on bank accounts to $200,000 in October and even started insuring debt offerings from financial institutions.

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