Feds can break WaMu leases if FDIC takes over bank

By Adam Pincus | September 17, 2008 03:52PM

Bank branches that have seen explosive growth in recent years could be cut back substantially if the federal government takes over ailing banks.

The possible reductions are due to a little-known provision that gives the Federal Deposit Insurance Corporation (FDIC) the authority to break leases between a bank and a landlord once the institution has been taken over.

The rule combined with concern about risky mortgage securities and other assets have analysts looking at possible outcomes of a failure of a national lending institution such as Washington Mutual, one of a slew of banks that have stormed into New York City in recent years.

A buyout of the Seattle-based bank might occur in the not-so-distant future. And if that happens, its demise would be the largest bank failure in U.S. history, the Washington Post reported.

The Associated Press reported today that federal regulators have been speaking with large banks to organize a buyout of Washington Mutual.

The savings and loan giant saw its stock drop nearly 95 percent to $2.32 yesterday from a high of $39.25 in September 2007. Its credit rating was downgraded to junk status Monday by Standard & Poor’s rating service, adding to concern that the bank could be subject to acquisition.

A spokesman for Washington Mutual declined to comment, but in a statement Monday, the bank said that the rating downgrade will not affect its ability to borrow money, and that at the end of its third quarter, on September 30, its capital is expected to be significantly above required federal levels.

Christopher Whalen, senior vice president and managing director at research firm Institutional Risk Analytics, said he expected Washington Mutual to be sold or taken over by the FDIC as rating agencies and investors put pressure on the company. Washington Mutual is one of a number of banks with a large exposure to risky mortgage securities.

If the FDIC, which has taken over California-based IndyMac Bank, takes control of Washington Mutual, the government has the power to break leases, which would result in the retail landlords being forced to find new tenants, Whalen said. Washington Mutual has over 200 branches in the five boroughs.

In a more likely scenario, were Washington Mutual to be bought by another bank such as JP Morgan Chase, Wells Fargo or HSBC, the purchaser would have to honor the full term of the leases.